Shakespeare’s admonition that “all that glitters is not gold” has endured for good reason, but in the markets recently, it’s taken on new meaning. Lots of things are glittering, but not gold, nor the companies that mine it. Low inflation, a soaring U.S. dollar and a three-year bear market combined to send the benchmark PHLX Gold/Silver sector index, known as the XAU, down to levels not seen since November 2008.
There is no argument over the direction of the current trend, which is down. The question is whether this week’s end-of-quantitative-easing selloff is the final washout of the bulls leaving nobody left to sell.
The gold/silver index peaked in 2010 and 2011 and is now down 70% from that lofty perch (see Chart 1). The volatility and steepness of decline are not new, however, as it scored a smaller but sharper decline in 2008.

Chart 1

PHLX Gold/Silver Index

What is more important than the ongoing bear market is to determine if support at the 2008 bottom will halt the decline. Has every last bull finally given up? If so, supply will dry up, leaving dry tinder for any bullish spark. Let’s zoom in a bit to see the sector’s current technical condition, and then turn to other factors in order to draw a conclusion.
Earlier this month, the Market Vectors Gold Miners exchange-traded fund dipped to support defined by the lows set last December (see Chart 2). When it got there it quickly found buyers – a lot of buyers – and it scored a bullish reversal on exceptionally heavy volume. On that day, the market was digesting the minutes of the Federal Reserve’s last meeting. It seemed that bear market was starting to wane.

Chart 2

Market Vectors Gold Miners ETF

But with last week’s decline back down to support, the reversal was negated and the tone in the sector changed from hopeful to dejected. And after Wednesday’s widely expected news that the Fed would end its latest bond buying program and hold the line on interest rates, the ETF crumpled below support.
There is very little evidence on the charts to refute the strength of the bear market here. Momentum indicators such as the relative strength index (RSI) are pointing to weak but not oversold conditions.
Volume indicators such as on-balance volume suggest supply is still trumping demand. And price action itself is just now breaking down from a one-year trading range, which is far from the definition of a selling climax or panic bottom.
Indicators away from the charts agree. For example, John Person, president of and co-author of the Commodity Traders Almanac, said that weakness in gold as a commodity usually persists through mid-November. This seasonal tendency is not a guarantee, but over the decades, on average, the gold market is weak this time of year.
And sentiment analysis also points toward continued weakness, as traders are not yet unified in bearish views. Jake Bernstein, veteran trader and proprietor of, reports that his Daily Sentiment Index, a survey of futures traders’ views on market direction that he has maintained for many years, is still well above levels that indicate excessive bearishness. Such bearishness would imply that most everyone who wanted to sell has already done so, suggesting a bottom was near.
The question then: How low can it go? Of course, we cannot know for sure, but it does appear that there is enough room on the charts for a return to the lows of 2008. For the gold miners ETF, that could be a drop to $16, roughly 14% below Thursday’s trading near $18.20.
If and when that occurs, we might finally see the end of the bear market, although that does not necessarily mean gold stocks will head back up. Kevin Schweitzer, senior vice president at Maxim Group, thinks that when the bottom is finally found, money will flood into the smaller mining stocks. Indeed, these stocks, represented by the Market Vectors Junior Gold Miners ETF have held up better this year than their larger cousins, and that suggests on the charts that they can come out of the gate with more power.
The conclusion is that the trend in gold stocks is still down and events this week have confirmed that. But when we combine chart patterns, seasonal factors and sentiment, we can build a case for a buying opportunity to finally present itself before the year is over.