Although largely left for dead, it appears that gold and silver mining stocks might be queuing up for a solid move to the upside with the help of a bullish reverse Head & Shoulders that is forming on the Philadelphia Gold & Silver Index (XAU). Neckline resistance on this pattern sits at 104.60, just above the close on Friday at 101.97.
With little evidence that current geopolitical goings-on have caused any sustained run-to-safety into the precious metals markets, and with global jewelry demand down roughly 30% from last year, investors cannot seem to find the courage to buy gold and silver mining stocks.
Nevertheless, it might be deepening economic sluggishness in Europe that could force the ECU to take bolder measures to stimulate growth and at the same time stave off the threat of deflation, which could ignite some interest in precious metals and the XAU. In addition, Japan has just suffered the sharpest contraction in GDP (-6.8%) since 2011 in the aftermath of their 8% consumption tax hike in April. That could cause Japanese policy makers to delay or possibly suspend an additional 2% sales tax that was slated to be implemented by 2015. If so, more attention might be paid to the staggering government debt in Japan that is now above 230% of GDP.
In the U.S., much attention will likely be paid to insights offered by Janet Yellen at the Jackson Hole conference later this week. Her stance is likely to remain dovish regarding monetary policy (even though QE is coming to an end) and openly tolerant to the possibility that wage inflation could emerge over the coming year or so. If so, expectations for a rise in inflation could become a factor particularly with longer dated U.S. treasury yields so low.
Interestingly, the technical objective of the bullish reverse Head & Shoulders pattern on XAU sits at 142, or 39% above current levels. That would be an outcome that would not be in-line with most current forecasts, which, by itself, could be another reason why it might actually happen.
Jim Donnelly, Olson Global Markets
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.