Wednesday, September 5, 2012

Dow Theory signals a new primary bull market in gold and silver miners

In my posts of August 29 and 30 I said that a new primary bull market  for gold and silver had been signaled by the Dow Theory. You can find the analysis I made of the gold and silver markets here and here.

I wrote that the only negative note was the absence of confirmation under Dow Theory of a primary bull market in the precious metals stocks. Until gold doesn’t become officially money (or reserve asset), both the metals and their respective stocks shouldn’t widely diverge. When (or if) our monetary system gets revamped and gold fully expresses its value then we shouldn’t expect the miners to move more or less in tandem with gold. But until this occurs, we may consider gold and silver and their miners as a relatively similar asset class.

This is why I always monitor GDX (the gold miners ETF) and SIL (the silver miners ETF).

Today, September 5th 2012, both mining ETFs have confirmed a new primary bull movement.

As I said when writing about the Dow Theory signal in the gold and silver markets:

[i]n Dow Theory the expression “primary movement” defines a bull or bear market over periods that span from less than a year to several years. Thus, the movement that under Dow Theory started […] is supposed to be significant both in extent and duration. Maybe 6 months or maybe 2 years.

To learn more about the implications under Dow Theory of a new primary bull market movement and why it is sensible to apply the Dow Theory to the mining stocks as well to gold and silver, please read my post here

I’d like to note that SIL/GDX ratio is moving in favour of SIL which in the short and medium term tends to be bullish for both GDX and SIL. When markets are in “risk off” or QE mood, silver tends to outperform gold. However, when the going gets tough, gold tends to be stronger and decline less than silver.

GDXJ (the junior miners ETF) is outperforming GDX which confirms that, at least short term, risk appetite and/or the expectations of more QE are coming back in the markets. See the chart below:

The GDXJ/GDX ratio turned bullish in favor of the junior miners. "Risk on" back to the markets
  This chart plots the GDXJ against GDX. We can see that since June 28, 2012, the ratio (red line) has been moving relentlessly up, showing that the juniors hold the upper hand. Please note that, as per my interpretation of the Dow Theory, the stock market entered a primary bull market on June 29, 2012. Coincidence? I don’t believe in coincidences. The market is clearly telling us that the tide was turning already by the end of June in favor of more liquidity.

So now we can put all the pieces together:

  1.  The stock market is in a bull market since June 29, 2012.
  2.   Gold and Silver are in a bull market since June 28, 2012 (remark: the bull market was signaled by Dow Theory on August 22, but the lowest point of the move was made on June 28 and since that date the bull market got started. However, it was not tradable until August 22). 
  3.  The GDXJ/GDX ratio is in favor of the juniors since June 28, 2012. 
  4.  Gold and silver miners are in a bull market since May 16, 2012. 
  5.   SIL/GDX ratio clearly favors silver stocks.

In my opinion the market seems to say that liquidity will lift all boats. Definitely, it is not a market to short.

Tomorrow I’ll post one chart with the details of the Dow Theory signal for both SIL and GDX and the number crunching inherent to all Dow Theory signal.

Until then,
The Dow Theorist

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