A Bottom In Gold But Not The Bottom

Gold has struggled to rebound despite an extreme oversold condition and extreme bearish sentiment. Nevertheless, conditions for Gold have not worsened in recent days. In fact, Gold, as well as gold stocks, appear to be basing for a potential rebound into the holiday season. While some gold bulls expect a major bottom, we aren’t in that camp because the fundamentals are not in place yet to support a sustained advance.

The weekly chart below shows several positives for Gold.

First, last week Gold made a somewhat bullish candle after six weeks of testing $1180-$1190 support and failing to make new lows. With a daily close above $1215, a short-term bottom would be confirmed.

Secondly, note the rate of change indicator as well as the distance from the moving average. Both show Gold as the second most oversold in the past 2.5 years.

Gold Weekly w/ Indicators & CoT

Finally, Gold’s net speculative position is -2% of open interest, a 17-year low. Speculators are net short for the first time since 2001. This does not mandate the start of a major bull market but it does argue for Gold to rally soon.

Next, we plot GDX along with its advance-decline line and the GDX to Gold ratio.

One reason the rally has yet to materialize is the lack of strong breadth as shown by the advance decline line. It did form a positive divergence in September but it has yet to show any subsequent strength.

The GDX to Gold ratio is showing strength, which is a positive sign. Look for the rally to begin when the advance decline line strengthens.

GDX Daily w/ Indicators

So why isn’t this a major bottom for the sector?

As we’ve shared for months, the majority of bottoms in gold stocks (but not all) over the past 60 years coincide with the end of Fed rate hike cycles. We’ve also noted that every major cyclical move in Gold (ex 1985-1987) coincided roughly with some kind of bear market in stocks.

When the economy and stock market weaken, the Fed will end its hikes and Gold will begin to outperform stocks. If the Fed cuts rates then precious metals will begin a strong bull market.