Putting Everyone to Sleep

Something interesting is happening in gold lately – namely, the action in it has become totally uninteresting. Daily trading ranges are becoming ever smaller, as the price is pinched between the declining 50 day moving average and the flat 200 day moving average. In the process, another small triangle has been built, so to speak a triangle within the triangle. Below is a weekly chart that shows the big 18 month long triangular consolidation with the most important lateral support and resistance levels drawn in, followed by a daily chart that shows the smaller triangle.

 


 

Gold, LT

Gold in USD terms, weekly. As can be seen, the price movements over the past seven weeks have been extremely small. On the weekly chart neither MACD nor RSI are giving us a buy signal yet, but they could do so at any moment – click for better resolution.

 


 

Gold, ST

Gold, daily. Here we can see the 'triangle within the triangle'. Both MACD and RSI have been rising during this triangular consolidation. Interestingly, trading volume has been quite strong, normally it would tend to decline in a triangle – click for better resolution.

 


 

One interesting aspect is that while gold has essentially done nothing (although this is of course not true of gold in yen, which has reached the highest level since 1980),  quite a few bearish articles and reports have been published by various mainstream sources. Credit Suisse recently declared the bull market to be 'dead' and numerous sell side analysts have lowered their short and long term price targets. Readers may recall that many in this group only turned really bullish on gold back in 2011 when it approached its November spike high. Ever since then, the gold price has struggled. The fact that these guys are now going back to 'business as usual' (of ignoring gold) is undoubtedly a good sign.

One should ask what has really changed fundamentally. Over the past year there has on a global basis on average been one central bank easing action per day, as one of our readers reported in this excellent presentation (we highly recommend watching it by the way).

We have the leaders of industrialized nations openly talking about a 'currency war', respectively fretting over the need to avoid one, even while all of them try to weaken their currencies concurrently. Following Shinzo Abe's successful attack on the yen, the Europeans especially have begun to fret, as euro-land remains mired in recession. Not surprisingly, the most recent attempt to 'do something' about it was voiced by the socialist throwback president Hollande of France, who argued that EU governments should “control the exchange rate of the euro” (read: bring it down). The FT reports here on this call for a 'managed exchange rate'. Hollande said:


The euro should not fluctuate according to the mood of the markets,” the French president told the European parliament in Strasbourg on Tuesday. “A monetary zone must have an exchange rate policy. If not it will be subjected to an exchange rate that does not reflect the real state of the economy.”

 

Ah, those evil markets again. Hollande hates the free market, which he apparently believes is the cause of all that is bad in the world. If political leaders wanted no exchange rate fluctuations, they should have stayed with the gold standard; it's as simple as that. Of course, that would imply a much smaller State and far less government spending, so they will have to live with those 'fluctuations', at least until they can push through the old Keynesian wet dream of a global fiat currency (the 'Bancor').

 

Meanwhile, the current 'winner' in the currency war, the yen, has devalued mightily against gold as well. This is mainly notable for the reason that the 2005-2006 rally in gold was also led by yen gold.

 


 

Gold in yen

Gold in yen, weekly. The highest level since 1980 – click for better resolution.

 


 

Gold Stocks and Sentiment

As everyone knows, gold stocks have traded very poorly in recent months and weeks. Their main problem is that costs keep rising, while the gold price is merely trending sideways. Moreover, sentiment has turned extremely sour, so that valuations have been compressed to rarely seen levels. Traditionally, gold stocks have traded at a valuation premium to the broader stock market – now they trade at valuation discounts ranging from 40% to 60%.

Once upon a time, the HUI index was the preferred index as it contained only 'unhedged' gold stocks. Ever since most hedge books have been covered, the XAU has however in a sense become the more representative index, as it has 30 component stocks as opposed to the HUI's 17.

Below we take a look at the XAU-Gold ratio. This ratio has now reached the level it inhabited just after the 2008 market crash. It is almost 50% below the level in 2000, reached after a 20 year long grueling bear market. Gold stocks have rarely been as weak relative to gold as they are now.

 


 

XAU-Gold

The XAU-gold ratio: gold stocks have rarely been as weak relative to gold as they are now – click for better resolution.

 


 

On the one hand, this tells us that gold stocks are probably a bargain. On the other hand though, this should be regarded as a slightly bearish omen for gold until proven otherwise. However, as will be seen further below, sentiment on gold is currently so subdued that the downside potential seems limited by dint of that fact alone.

Next we look at the HUI index, both the weekly and daily charts. Neither chart looks especially encouraging right now, but that could of course be subject to change at any moment. On the daily chart an interesting 'indecision' formation has formed in recent trading days.

 


 

HUI, weekly

The HUI, weekly – this is not a particularly encouraging chart right now – click for better resolution.

 


 

HUI-daily

The HUI, daily. As can be seen, similar 'indecision' formations as the one that has just formed (indicated by the blue circles/ellipses) have resulted in both bearish and bullish short term outcomes. The formation as such therefore thus doesn't tell us what to expect, except that a move of some significance is likely going to happen soon – click for better resolution.

 


 

Next we take a look at a few positioning and sentiment data. The commitments of traders report in gold has improved lately (this is to say, the speculative net long position overall has declined), but we are still slightly worried about the relatively large net long position held by small traders. At about 40,000 contracts net, this is historically not exactly a small position. By contrast, the big speculator net position has reached a level that has often marked low points in the past. Even so, this position could also shrink further. However, the COMEX has just reduced margin requirements for gold and silver again, which could encourage speculators to increase their exposure.

Also, as our frequent guest author and director of the US Gold Standard Institute Keith Weiner pointed out to us recently, the shape of the gold futures curve looks bullish. In February, there is a slight backwardation to spot gold, while the April contract's contango has almost completely disappeared. This indicates that demand for physical gold must be quite strong, and per experience, strong physical demand tends to “frontrun” changes in the gold price.

 


 

CoT-gold

Gold, commitments of traders. As can be seen, the small speculator position is still quite high, although well off its previous highs. The commercial net short position and the big speculator net long position have reached levels that could allow for an expansion of speculative buying – click for better resolution.

 


 

Sentiment on gold remains subdued. Not only is there quite a bit of anecdotal evidence lately that former bulls are getting off the gold train, but surveys also show that sentiment is either non-committal or bearish. The DSI (the 'daily sentiment index', a short term futures traders sentiment gauge; unfortunately we don't have a chart of it) recently hit an extreme low at 6% bulls (it has since then risen a little bit, but remains very low). More medium term oriented sentiment indicators are shown below. First, the 'public opinion' chart published by sentimentrader, an index that merges several of the better known sentiment polls.

 


 

Gold-public opinion

The 'public opinion' index is not at an extreme just yet, but it definitely shows very little enthusiasm for gold – click for better resolution.

 


 

Finally, the HGNSI, Mark Hulbert's gold newsletter sentiment index, is just barely off its recent lows:

 


 

HGNSI

The current level of the HGNSI often coincides with lows, but keep in mind that  this gauge can remain stuck at low levels for a while. It is no guarantee that prices will soon rise.

 


 

All in all, the sentiment and positioning data give us however no unequivocal 'buy signal'. They merely tell us that the downside is probably limited. If we were to guess, there could easily be at least one more 'shakeout' in order to get small speculators in gold futures to capitulate and bring the sentiment gauges to new extremes. This would also provide an opportunity for the gold stocks to re-test their 2012 low. It is possible that such a retest is required in order to put in a durable low (preferably a retest at lower volume, following Tim Ord's rules for successful tests).

Note also that triangles sometimes first break in the 'wrong' direction before reversing. Such a progression would actually be a more reliable signal than a simple move up would be. The technical weakness of the gold stocks remains a major concern. Of course, things have changed a bit since the early days of the bull market. In 2000-2003 it was generally possible to infer upcoming moves in gold by the action in gold stocks, which were invariably leading the gold price. This is no longer the case, although in the short term, divergences are often still meaningful. These days however, gold stocks tend to follow more often than lead the gold price.

However, we still would expect to see some sort of positive divergence whenever the low point occurs. Much will also depend on upcoming earnings reports – at least expectations are pretty low these days, so this quarter's earnings may be better received than last quarter's were. One notable earnings report has already been released, that of Harmony Gold (HMY). In spite of strike action and the closing down of the large Kusasalethu mine, HMY once again reported a very strong quarter, with lower costs and better margins due to a higher Rand gold price. You sure wouldn't know it looking at the stock's price however, which has collapsed back to levels last seen in 2008 and 2005. This is emblematic for the extremely bearish sentiment the sector is currently subject to.

 


 

sector sentiment

The gold sector is currently the only market sector on which market participants are extremely pessimistic. This suggests that the sector may well rise when the broader market begins to decline (via Sentimentrader).

 


 

 

 

Charts by: Sentimentrader, StockCharts


 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

2 Responses to “Gold – A Brief Technical Update”

  • SavvyGuy:

    IMHO, the only thing that corrodes gold is high or rising interest rates. If you look at the price action of gold and T-bonds during the middle of December 2012, it appears that the drop in bond prices (rise in yields) did manage to put a scare into the gold price, dropping it below lateral support at around 1680.

    Not to worry though, another can-kicking exercise with all the attendant political grand theater is to be expected soon, which will likely kick gold upwards into a shallower Gann fan angle emanating off the 2011 highs.

  • Bogwood:

    Would a benevolent prince close all the gold mines? There is a century of “supply” above ground. The energy and pollution costs are staggering. Would an actual free market close the gold mines? If there has to be a mining cost factor in the price of gold leave one standard mine open in the most market oriented country. Yes, I will probably buy the XAU on Monday but there is a dissonance.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist