By Jim Donnelly
When looking at the monthly bar chart of the Philadelphia Gold & Silver Index (XAU) on a linear format, it is evident that after a nearly 3-year long free fall, it is quickly approaching a test of long-term trend line support at the 77 level. With deeply oversold conditions present on long-term charts as well, the 77 level looks like an attractive point-of-interest to potential buyers of stocks within this sector. Moreover, a new round of bearish forecasts made by a number of key commodity analysts might ironically serve as some sort of extreme when considering investment sentiment a few months from now.
There is no doubt that the economy continues to post better-than-expected job gains, stronger-than-expected auto sales, an acceleration in growth as measured by November PMI report and modest wage increases. Nevertheless, these numbers have teamed up to sent yields on 10-year Treasury notes higher, which could crimp housing activity and related product sales in future months.
Still, there is an expectation that current economic conditions will entice investors away from precious metals and into growth stocks. The only problem with this viewpoint is that the Philadelphia Gold & Silver Index has already fallen by 65.3% to the 80.65 level from its peak of 232.72 in December 2010 suggesting that the economic turn-around may have already been discounted and priced into the market.
Others suggest that the severe 3-year plunge in the XAU is a reflection of disinflation and the threat of future deflation, which the Fed appears to have been waging a massive multi-year monetary war against since 2008/2009.
In any event, a number of the components of this index are concurrently nearing their respective long-term trend line supports including: Silver Wheaton Corp.(SLE); Pan American Silver Corp. (PAAS): Newmont Mining Corp. (NEM); Gold Fields Ltd. (GFI); and Eldorado Gold Corp. (EGO), while others, like Barrick Gold Corp. (ABX) appear to be forming bullish reverse Head & Shoulders patterns (albeit with sagging right shoulders). As a result, most of the price damage may have already occurred making current levels in these stocks look extraordinarily attractive.