Davis Ramsey

The above chart is a fairly accurate representation of where the miners/metals trade currently stands. Despite the many factors that appeared to be playing in our favor, the ECB press conference this morning really got momentum going to the downside. The ECB is reluctant to provide more short term easing and hopes that governments will take up long term structural reforms instead - clearly if they are successful in this approach, it is extremely bearish for gold since it proves high debt loads can be fixed with austerity without the side effect of destroying the economy. That was essentially the theme playing out today in my view. Gold was able to hold above 1620-1630 support and silver was able to end the day north of 30, so there is at least some reason to think we can recover from here. The bigger reason for going long the metals and miners remains intact though - the sector is still significantly oversold and ripe for a multi-month move higher. At the end of last week the trade seemed to finally turn to the upside and I am sort of surprised that we have been unable to build on that reversal. I have rotated my positioning into miners that are showing relative strength compared to GDX - that is, did not make a new low today compared to last week (AG EXK SLW for example). Until we can see moves above 47 on GDX and 1680 on gold, there is always a risk of more selling though as I said, conditions are ripe for a multi-month rally that I am confident will soon present itself. Despite what the ECB would like to believe, without short term easing any long term structural reforms are not likely to succeed. The weaker European markets are already under heavy selling pressure - if the ECB does not continue to engage in easing programs, the selling will only accelerate which would not only continue to hurt the economy, but also make any further austerity or proposal for a European fiscal union very difficult politically.

As far as the market, the reversal after the big ISM rally on May 1 has so far held, though we've seen only moderate selling over the last two days. It should come as no surprise that I think the odds are against another 'sell in May' trade this year, and that it seems more likely that we will instead target a new high for the year and the early-mid April lows should hold. Breadth supports that conclusion in my view, but trading short against the May 1 highs certainly makes sense from a technical perspective so it is difficult to completely rule out the bearish case.

Gold dropped nearly $15 in the blink of an eye after the data on personal income was released at 8:30 this morning and admittedly I was not optimistic about a quick recovery. Fortunately the aggressive dip buyers who swooped in during Fed day last week were once again ready to step in, with GLD making it's low for the day in the first hour of trading and ultimately closing marginally higher. Though GDX was a marginal underperformer relative to gold, many of the miners in my portfolio and others I watch were strong outperformers with many sporting strong gains on increased volume by the end of today's session. The turn around today is more evidence that we are in the early stages of a significant rally - in different conditions, today would have seen large declines in both mining shares and the underlying metals. The fact that we were able to not only avoid a blood bath but actually see pockets of strength is very encouraging. There is a LOT of potential market moving news this week between the laundry list of worldwide economic data and the ECB decision Thursday morning. Though the evidence certainly appears to suggest we have seen the low and are now turning higher for a multi-month rally, it will not be an easy one way street and if you're involved in this trade, you should be prepared for volatility to increase in the days and weeks ahead.