After five full years of making the markets believe that an interest rate hike is around the corner, the U.S. Fed still did not take any action. Although their message is very clear, i.e. they will for sure do "a" rate hike in 2015, it seems that their credibility is fading. Whatever happens in the ivory tower of central planners, the market is transitioning into a state of disbelief.
One of the consequences of the rate hike hype was the crash of precious metals prices in 2013. The market truly overreacted, and sent gold, silver and miners into a truly epic bear market state.
Meantime, precious metals prices seem to be bottoming. Given the growing disbelief in the interest rate hike, gold bears are leaving the arena. The first chart below is one of the indicators which proves that the bearishness is fading. It shows the put-to-call ration in GLD ETF, the largest gold exchange-traded ETF, which is now at the lowest level since the failed attempt of gold in 2012 to test its all-time high. Chart courtesy: Bloomberg.
Recent price action is becoming increasingly more constructive gold, silver and miners, as they are all pushing against their long term downtrend lines. Chart courtesy: Short Side Of Long.
This chart shows that a HUGE breakout is now a real possibility, and that gold traders seem to be anticipating that the Fed won’t rise rates in 2015, as noted by Short Side Of Long. Furthermore, if the stock market and economy weakens, more and more of the commentary could turn towards dovish views of more QE easing. One thing is for sure, hedge funds and other speculators are definitely underinvested towards this sector, as evidenced by the following chart. That is, in our view, the ultimate strong contrarian signal !
It is getting very excited in the precious metals market.