Gold and Gold Miners are Due for a Big Correction

gold-coins-question-markTechnical analyst Clive Maund reflects on why the Fed’s commentary isn’t really a big deal for precious metals, and explains why he thinks the sector is due for a correction.

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Chart courtesy of www.sentimentrader.com

While the Fed is almost powerless these days, as it has succeeded in “painting itself into a corner,” the markets still seem to think that its utterances are important and react, sometimes violently, to its apparent stance, or implied stance.

For this reason we have to treat Fed statements as important, even though they really aren’t. Friday we had the Fed making pronouncements, and the markets reacted violently, as expected.

In general the Fed still seems reluctant to “rock the boat.” Powerful vested interests—what may be described as the status quo—want Hillary Clinton as the next President, as she will serve as their marionette and do their bidding. Trump can talk a lot, but even if he gets in won’t make much difference for two reasons. One is that he is the candidate for the Republican Party, and the same plutocrats control the Republican Party that control the Democrats—they are two sides of the same coin. So if elected Trump will have to buckle down and do as he is told. If he tries to seriously take on the military-industrial complex that runs the U.S. he will end up like JFK. In any event, he has already indicated that he will yield and comply, by talking about “beefing up our great military” and by paying homage to “our great friend in the region (Mid-East) Israel.”

So whoever gets in, the outlook for the ordinary American citizen remains hopeless, despite all the mindless pre-election hype and razzmatazz. Of the two candidates the powerful vested interests, of course, prefer Hillary, so we can expect the Fed to do as little as possible to upset the markets ahead of the elections (i.e., nothing of any consequence).

Although at first sight it looks like we are being presented with a buying opportunity in the precious metals sector, which has reacted back over the past couple of weeks, we have to careful here. There has been no major correction in this sector all this year, which is inflated after months of rallying, and we will look at some evidence here that the correction may have considerably further to go, in points terms if not in time terms.

We will start by looking at the eight-month gold chart (ETF version: SPDR Gold Trust ETF (NYSE:GLD)). As we can see, although stocks have been slammed over the past couple of weeks, gold has barely dropped yet, although it has broken down from a Triangle as predicted at the start of the week in Gold and Silver Probable Short-term Scenario. If the dollar rallies, gold could get whacked back to the vicinity of its 200-day moving average, now at about $1,220. Such a drop would lead to further heavy losses in PM stocks over a short-term time frame, and would be expected to be followed by a reversal to the upside, and thus present a MAJOR buying opportunity.

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The latest gold Hedgers chart (a form of COT chart, shown at the top of the article) shows an extremely lopsided situation that normally calls for a significant drop, and it has contributed to our cautious stance of recent weeks…

On the latest 8-month chart for the Market Vectors Gold Miners ETF (NYSE:GDX), the sector looks like it is at another buy spot. It may be, depending on how markets react to the Fed later, but other factors such as the gold chart above, and sentiment readings that we will look at in a moment, urge caution and suggest that instead the sector could break down into a short-term plunge that sees GDX correct back to the vicinity of its 200-day moving average. If the sector reacts positively after the Fed, it will be in order to buy it, but prudent to set quite close stops.

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After the latest retreat the Gold Miners Bullish Percent Index is still at an uncomfortably high reading of 75% bullish, which increases the risk that this correction is not done yet and could end with a nasty flushout that will also throw up a great buying opportunity.

This article is brought to you courtesy of The Gold Report.

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