"Courage is resistance to fear, mastery of fear, not the absence of fear." -- Mark Twain
With Tuesday's plunge in gold, silver and the miners, the prospects for the precious metals complex have started to turn increasingly grim in the near term, according to my models.
Tuesday's plunge is further confirming my view that the recent rally may have been one of the most devious bear market rallies in gold's modern trading history.
If so, the risk as I see it going forward is not a modest decline -- but a meltdown. Possibly a crash. That's because the real risk is that the third leg of the precious metals bear market -- which had unexpectedly truncated following the December lows -- may be about to resume and complete.
IF the third leg resumes, as I suspect is likely, the damage, particularly to the miners, could be of significance.
That's because the third leg of a bear market is often where the real carnage takes place. That's where the final devastating washout tends to take place, as long-term holders give up hope and simply throw in the towel in disgust.
IF the third leg of the bear market resumes, my expectation is that gold will fall below $1,000 and the HUI gold mining index will get cut in half from current levels -- or worse. Under such circumstances many individual miners could simply implode, depending on their finances and the quality of their ore body grades.
That being said, the flip side is that IF the third leg of the bear market resumes, the coming bottom will likely represent a significant opportunity for those who are prepared for it.
The big news in Tuesday's decline was the drop in silver. Silver fell to the lower boundary of a possible coil formation, and is threatening to break below the coil's bottom boundary. Such a break would be ominous for the entire precious metals complex. Here is a chart of the SLV, the silver ETF, showing the action:
IF that coil breaks down in silver/SLV, silver is likely to sell off hard in the weeks ahead.
With Tuesday's decline, both the HUI gold mining index and the junior miners ETF GDXJ are both trading below the 50% retracement level of the rally off the December lows. That's bearish.
Further, that potential head and shoulders top in the gold miners ETF GDX is getting closer to activating. IF it does activate, new bear market lows for the GDX likely lie directly ahead:
To provide some balance, bulls may see a head and shoulders bottom in the GDX:
I see too much negative action overall in the charts to put much stock in a bullish outcome, but am aware of the possibility. There was late buying of the miners that took them well of the worst of the session's lows, which I assume was due to a combination of short covering and bulls who think a major bottom is completing in the miners.
My view at present is this is likely one of the most devious bear market rallies in the PM sector's history, and it is working to keep bulls' hopes alive as along as possible. Time will tell.
As for gold, that descending coil appears to be the operative pattern for the Noble Metal:
Until proven otherwise, I am assuming this chart pattern is the controlling pattern in gold. That gold's descending coil had a false upside breakout, makes the coil especially bearish in my view. As such, I expect the coil will express itself fully IF it breaks to the downside.
The bottom line is my models warn that a breakdown of the coil in silver and the head and shoulders formation in GDX would be a strong signal the third leg of the precious metals bear market has likely re-activated. With Tuesday's plunge, both GDX and silver appear to be toying with possible major chart breakdowns in the days ahead.