gold falling knifePrecious metals showed bullish technical signs in early 2015, including gold making a higher low at $1,141 versus the November 2014 low of $1,130. However, in late May gold failed to make a higher high, which was a pivot point and signal that lower prices could be ahead. This bearish signal was confirmed on July 20th, when gold dropped below both the 2014 and 2015 low and we published an article stating our bearish short-term outlook. Prices have continued to slide since then, with gold down another 4% and mining stocks falling by nearly 14%.

Gold’s price volatility has increased recently, with a sharp drop to $1,080 and subsequent rebound to $1,100 on Friday. This bounce gave gold bulls some reason for optimism, but the price has once again dropped back towards $1,080 today.

Lower gold prices are being driven by economic weakness in China and a crash in their stock market, down more than 30% in the last month alone. Weak factory activity and consumer spending in the U.S. are also harming gold, which is acting more like a raw commodity than a safe-haven asset. Lastly, a strengthening dollar is also hurting commodity prices, with a the USD bouncing higher over the past six weeks.

Investors are now wondering what’s next. Have commodity prices bottomed? Is this a good time to buy the dip aggressively?

In my view, lower prices are on the horizon and it would be premature to begin backing up the truck at this juncture.

The gold chart shows failed support first around $1,180 and then at $1,130. These were critical support levels that gave way and turned our short-term outlook bearish. Looking forward, there is no clear technical support until $1,000 gold, which is also an important psychological support level. $1,000 gold was resistance several times in 2008-09 and resistance often turns into support.

Below $1,000, there is additional support around the $850-$875 level, which was prior support during 2008 and 2009. And the final level of support is at the financial crisis low around $680, although I find it highly unlikely that gold will drop this low without another major crisis and panic to liquidity. Even then, the same v-shaped recovery pattern can be expected as bargain hunters step in looking for value.

gold chart

The RSI remains oversold, suggesting that a bounce is possible in the short-term. However, sentiment remains bearish and I believe more downside is likely over the next few months. I think it is wise to wait for a clear bottoming process and series of higher highs and higher lows before re-entering long positions.

I’ve often written about fundamental support near the cost of production. I still believe that prices can’t persist below the cost to produce gold and silver for long, as miners shut down operations and the sharp drop in supply pushes prices higher. However, this process could take a year or longer to manifest, as many miners continue producing at a loss or at marginal profit levels.

It can be difficult for gold investors to wrap their head around such a deep correction occurring after one of the largest monetary stimulus events in history. Europe and China are now following suit, pumping money into their economies, stock markets and banks in order to keep things afloat. This practice is obviously unsustainable in the long-term, but it has worked up until this point. The U.S. stock market has roughly tripled from 2009 crisis lows and the big banks have avoided realizing the massive losses to their balance sheets. Hundreds of billions in derivatives have yet to explode and the fiat fractional reserve monetary system rolls on.

We have hedged our positions in the GSB portfolio and increased exposure to other sectors that have been advancing. It has still been a rough few years, but this strategy has mitigated losses. We hold a defense stock that is up 75% year to date, a agriculture play that is up over 50% and an energy stock up double-digits, despite the sharp drop in oil prices. Our technology portfolio has generated strong gains in 2015, with nine positions up double-digits this year and four of those up 50% or more year to date.

There will be a time to move aggressively back into commodity stocks and I believe we are getting close. However, we are not there quite yet, so we remain patient and hedged, while seeking profit opportunities in other sectors.

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