This has been the year in which gold, silver, and mining stocks have completely exploded to runaway from the S&P 500. Gold bugs are killing it in this market. If you have been paying attention to my updates this week then you have seen what this has meant for small cap mining stocks exhibited by my top stock pick for this month. However, the big rally in the metals markets is now causing a lot of consternation for people as there are some who have simply sat there watching it go up who now feel like they are missing out and others who are already invested who are worried about a gold crash, because they see some out there calling for one.
If you have been worried about either of these two things I have good news for you – and something you may want to do now. Gold tends to trade opposite to the US dollar index. Some people like to buy the US dollar by buying the INVESCO DB DLR /BULLISH FUND ETF (NYSEARCA: UUP), but the easiest way to track it is by looking at the US dollar index itself, which has been in a steep decline for the past six weeks now. So let’s look at that chart.
Both the daily stochastics and RSI momentum oversold/overbought indicators are showing an oversold reading for the US Dollar index. Historically when any currency goes into a bear decline and gets oversold like this it typically will hold up and drift for two to three weeks before breaking down and continuing to decline. Now the US dollar got oversold last week and bounced and is now testing last week’s lows, but these indicators suggest it will hold those lows for a bit here – or at least not have another big decline for another week or so.
Now the overall trend is down so this is not to say one should buy the dollar, but gold trades opposite to the dollar index so this suggests that gold is likely to enter some trading range here for a few weeks before having another big rally. Perhaps it will trade between 1990 and 2100 here this month. That would give the big cap mining stocks a breather and also a chance to consolidate to pave the way for the next big rally as that is how bull markets work.
That would give a great entry point for people looking to buy mining stocks. You don’t really want to buy them when the metals are surging through new highs, but when the metals and the mining sector pauses. That is the sweet spot as consolidation give entry points for people who are not already in. In fact my top stock pick for the summer after rallying huge in June is now doing just that and I believe is at a good entry point now. You can find my last post on it here.
If the dollar falls through this recent low it is going to spark a big rally. My private Power Investor members know of two major currencies that are right on resistance poised to breakout. One is on an over four year resistance point. Right now I’m watching it more than anything else, because once it breaks I think is when we’re going to see the next leg up in mining stocks, gold, and silver really begin after this likely quick pause time. If you are not in my private group you can join by going here.
Now there are veterans to the metals market who see these resistance points and are worried about a gold crash. Here is one email I got:
“Hi Mike You’ve made some great calls but I’m still getting the feeling I had in the 1979 gold bull run that like then this is all going to end in tears. Unlike you I think the Robinhooders are into gold in fact wherever I go the most unsophisticated are all telling me to buy gold just like before. But we will just have to see oh how I remember the Hunt Brothers with the Silver price that really turned round to bite 5hem!Keep up the good work
Regards
Ray”
When I talk about the Robinhood people I am logging into my little Robinhood account. They show you the exact number of people who own a stock or ETF so this is real data I am talking about. As far as gold and the 1970’s – gold and silver crashed after going up for almost a decade and peaked after inflation got so bad that the Federal Reserve began to raise interest rates and got them close to 20%.
There is no sign the Fed is going to do that anytime soon again. Once it starts talking about raising rates it will be time to look for a gold and silver peak, but real inflation hasn’t even begun yet so I think it’s too early to be looking for this turning point – way out in the future. Gold, silver, and mining stocks will have its ups and downs and there will eventually be a 10%+ correction in the metals, but I see no evidence it is starting yet. In now the chatter is that in September the Fed is going to make a big pledge to abandon its dual mandate and stop trying to keep inflation below 2%.
-Mike
