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