How Bitcoin and the Fed Brought Us a Gold and Silver Bottom

The biggest question on every precious metals investor's mind, probably without exception, has to be: "Have gold and silver bottomed?"

It's the key to making smart - and profitable - buying decisions.

Of course, nothing in the markets or investing is ever that simple.

But today, we're going to look at some recent clues that strongly support a likely interim bottom for precious metals - and precious metals stocks, of course.

It's looking good.

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Great News in a Turbulent Year

It's been a tough year for gold stocks, both big and small.

Here's what the Gold BUGS Index (NYSE: HUI) has looked like over the past year.

While gold stocks may be up since mid-December 2016, the gain is a modest 12%. Compare that with the high this year, back in September, when gold stocks were up a much more impressive 33%.

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So what happened? Well, the stock market, for one, kept climbing throughout the year and setting new records in the process.

Then, at essentially the same time as gold stocks peaked in early September, the U.S. dollar started on its most recent rally. That, along with Bitcoin mania and strong oil, has sucked away some interest in precious metals.

Here's some perspective on the U.S. Dollar Index's (DXY) recent rally.

That, of course, caused a pretty strong headwind for gold, as the DXY gained almost 4%.

But if we look at more recent action, the prospects are encouraging. Note also that the dollar may be completing a bearish technical "head-and-shoulders" formation.

If the DXY closes back below 93, then 91.5 will be the next crucial level to watch. We may have seen an interim peak for the dollar near 95 in early November.

Consider, too, that the dollar sold off after the U.S. Federal Reserve's Dec. 13 press release.

Why? It couldn't have been the rate hike; that was exactly as expected.

More than likely it was the FOMC statement, in which members projected tame inflation expectations in the near and medium terms. Market observers interpreted that to mean that rate hikes in the next year or two may come at a slower pace than originally expected.

Lower-than-expected rates just don't support a higher dollar. And by extension, that would help to buoy gold and silver prices.

Here's what happened to gold and silver stocks recently.

Looking at the VanEck Vectors Gold Miners ETF (NYSE Arca: GDX), we see that gold stocks sold off along with gold starting in early September. But the day of the FOMC statement, GDX soared by 4.67% on more than double normal volume.

Silver stocks did essentially the same thing.

The main difference of note for the Global X Silver Miners ETF (NYSE Arca: SIL) is that volume picked up considerably already in the last week of November.

The sell-off action that both gold and silver stocks experienced over the past few weeks looks and smells like nothing less than a capitulation by the weak hands that held these stocks.

I believe, especially if the U.S. dollar continues to weaken, that the next couple of months may produce some impressive gains for this sector.

Consider that we saw exactly that kind of action in both of the past two years. The Fed hiked rates in mid-December 2015 and 2016 - and gold stocks rallied.

From mid-December 2015 until late February 2016, they jumped 20%. And from mid-December 2016 until late February 2017, they soared 30%.

It's just as likely they'll do the same from here - near the bottom.

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