The Fundamental Backdrop is Still the Same, But …

The FOMC statement was once again almost a carbon copy of the last one. The only noteworthy event worth commenting on is that in addition to the hawkish dissenter Esther George, John Bullard dissented because he felt the Fed's actions are not dovish enough (he's worried about 'inflation being too low' of all things).

Still, it is the market reaction that counts, and nearly all markets except the dollar reacted rather badly to Ben Bernanke's news conference – even though it actually contained no news. Treasury yields soared, stocks were whacked, and so was gold. When we last wrote about gold and gold stocks we remarked:

 

“Unfortunately the HUI index violated the previously highlighted gap support in Tuesday's trading, which killed the 'island reversal' idea (it did however revive the idea that all upside gaps in the index tend to eventually be closed). It was especially worrisome that this happened with gold relatively stable, i.e., the HUI-gold ratio once again went into the 'wrong' direction. Per ample experience that is a sign that gold is set to decline further in the short term (we are always open to surprises on that front, but those are rare).

Gold itself is conspicuous by its utter failure to profit from recent weakness in the US dollar. This is a bearish sign as well.”

 

(emphasis added)

That has indeed turned out to be the case. While neither gold now the HUI have as of yet broken to new lows, the charts certainly don't look good in the short term. It should be pointed out though that investors with a longer time horizon probably won't make a big mistake by buying on weakness. However,  in the short term all the tentative evidence that a bottoming process may be underway has by now been eradicated.

 

The negative short term factors discussed in the last update continue to hold sway.

Gold has now formed a descending triangle, and it is worrisome that gold in euro terms has already fallen to a new closing low, which means that the equivalent triangle in gold/euro is in the process of breaking down (the break is still very small, so it may be reversed, but we'll only believe that when we actually see it).

Below are several charts illustrating the situation. Interestingly (oddly in fact),  gold has also built a descending triangle relative to the CCI. This is odd because economic activity around the world looks very anemic, and usually gold tends to rise relative to commodities in such an environment.

 

 

 


 

Gold, descending triangleA descending triangle on the daily gold chart – click to enlarge.

 


 

Gold in euro

Gold in euro terms looks actually slightly worse. It has been a leader to the upside since 2005, is it now a leader to the downside? – click to enlarge.

 


 

Gold-CCIThe gold-CCI ratio – the descending triangle is in evidence here as well – click to enlarge.

 


 

If one looks at a comparison between gold and the dollar index, one can see that gold lately fails to react to dollar weakness, but reacts violently whenever there are signs of dollar strength.

 


 

DXY vs gold

The US dollar versus gold (green line) – gold declines whenever the dollar shows strength, but it fails to rise much when the dollar weakens. This continues to be negative sign – click to enlarge.

 


 

Gold Stocks

As noted above, the gold stocks have once again been leading to the downside, and have moreover confirmed the recent weakness in gold. The best thing that can be said about the HUI's daily chart is that a break to new lows would produce yet another momentum divergence (this is to say, a price/RSI, and price/MACD divergence).

As we have pointed out before with regard to the statistics provided by James Debevec in the context of past instances of gold stocks reaching long term 'oversold' extremes, there has been further short term weakness in gold stocks in all cases but one when a long term 'buy signal' was given. It may be worth contemplating the table showing the previous occurrences again:

 


 

Debevec20130603p5
James Debevec's table of previous long term 'oversold' buy signals in gold stocks. Here is his article on the phenomenon that provides additional color.

 


 

This is one of the reasons why we are saying that long term oriented investors probably won't make a mistake if they decide to buy on weakness. There would likely be a few more weeks of soggy action, but interestingly, the bigger the short term drawdown was in previous cases, the bigger the subsequent rally turned out to be as well.

Since the current correction is reminiscent of the 1970's mid cycle correction, we may see comparable weakness before a turning point is finally reached.

That said, in the short term, the charts certainly don't look particularly confidence inspiring  – as it appears now that the recent back and forth was not a bottoming formation, but rather a continuation formation. There is of course still a chance that a double bottom may be about to form in the HUI, which if it is to happen, must happen more or less immediately: 

 


 

HUI

The HUI is weakening again and the putative bottoming formation is beginning to look like a continuation formation. However, yet another price/RSI divergence is likely to be recorded if new lows should be made – click to enlarge.

 


 

There is also nothing positive to report in term of the HUI-gold ratio at this point in time – after an attempted breakout to the upside, it has reversed  very quickly again and is back at its previous low:

 


 

HUI-gold ratio-w-gold

The HUI-gold ratio and gold (green line below) – the ground that has recently been gained has been given up again just as quickly – click to enlarge.

 


 

Conclusion:

 

None of these charts look positive in the short term. A potentially bullish island reversal in the HUI has been negated, gold has built a descending triangle, and both gold and gold stocks are very close to breaking though near term support. In order for the short term picture to remain at least 'undecided', these support levels must hold – a possibility that can of course not be ruled out. It should become evident fairly soon whether that will happen or not.

It continues to be of concern that dollar strength begets weakness in gold, but dollar weakness fails to beget strength in gold. As a result of this, gold looks even weaker in euro terms than in dollar terms – and gold in euro terms has been a leading indicator for the dollar denominated gold for some time.

We continue to believe that the long term picture has not been altered by this downturn, in spite of how extensive it has turned out to be. Similar declines could be observed on two occasions in the 1960-1980 bull market in gold stocks (in both instances, namely 1969 and 1974-1976, gold stocks as measured by the BGMI plummeted between 60% to 70%). Moreover, gold stocks are at their weakest relative to gold since early 1942.

June is a seasonally weak month for gold. It could therefore be that the current weakness is only transitory, and that things will begin to look better beginning next month. Gold's behavior in the seasonally stronger period should actually provide us with additional clues.

 

 

Charts by StockCharts, table by James Debevec


 

 
 

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11 Responses to “Gold and Gold Stocks, Post FOMC Update”

  • Kreditanstalt:

    The paper-determined “gold price” has been totally NON-RESPONSIVE for months now. It fails to move on POMO. On bond movements. On crises in Europe. On Japan. On FX moves. On macro statistics. On BLS and other government “data”…

    Is the mechanism broken? Or is it REALLY true that nothing more than leveraged yield-seeking counts?

    Is EVERYONE chasing paper dollar yield???

  • Namor:

    Thank you Pater (and Team) for the excellent work your are doing on your Blog.

    Concerning the cost of gold mining, in various articles they are saying global cost of gold mining is around 1200$ per ounce (for example here http://goldnews.bullionvault.com/gold-mining-062820123).

    I have a newbie question : can the retail price go lower than extraction cost and stay low for some time ? Did this situation already happen in the past and what were the outcome ?

    In any case TGIF !! ;)

    Namor

  • Kreditanstalt:

    This action is all so utterly manipulated and counterintuitive – which is why trying to time either the “gold price” or the government/central bank interventions is a mug’s game. You simply have to be a long-term holder of real, physical gold.

    Who is doing the selling of (presumably, paper) “gold”? It’s constant and relentless – and is increasingly likely to be being done at a loss. Perhaps someone leveraged is so desperately short of cash that they have no choice but to sell everything and/or some entity is trying very hard to cause holders of ETF paper gold to release their metal onto the market.

    It’s been said lately that technical analysis has been rendered useless in a world in which every price, every value and every market is rigged, fixed, manipulated and subsidized…which is why charts are of little use. Indeed, there has been a tendency for chartists to pronounce lower targets the lower the “gold price” goes…when $1450 was hit they call for $1350; upon reaching $1300 now I hear some calling for $1030…according to this method, ZERO must be their ultimate target.

    When I see a chart analyst look into the future and declare that a price will retreat THEN later rise (or rise, and then later fall) I will give them credence!

    WHEN most of the weak-hand and dollar-yield-craving holders of paper are out of the market – and when most of the REAL metal is safely in the possession of those who value it as an anti-play on paper money – THEN perhaps your chart analysis will be meaningful once more.

    • I would say that there is a) a pretty obvious anti-gold campaign going on in the financial media; b) stops are being gunned for – all the obvious support levels have been broken lately, and that always leads to a cascade of selling due to margin calls. Also, I agree that c) gold is often a source of liquidity for many when they have trouble with leveraged positions in other markets. d) I’m on record for being long term bullish in spite of the current cyclical bear market. e) I have pointed out for some time that one must be mentally prepared for the possibility that prices could go lower in the short term, based on the charts.
      As I have pointed out several times, there was a pretty sizable decline in the 1970s that did not end the bull market. The ‘worst case’ target is derived from comparing this decline to the current one, plus what appears to be fairly obvious chart support. By the way, I do not want to be misunderstood as ‘calling for 1030’. I am saying: that is the worst case scenario. Personally I think the turn will come from a higher level, but we will have to await developments. Only three weeks ago things looked fairly good, and it appeared as though a turn may be at hand. I always try to point out what I’m seeing with as little bias as possible, although I am a long term bull for fundamental reasons and let us say ‘intellectually friendly’ toward gold.

      • rodney:

        That’s all fair; however, the most important piece you wrote in my opinion is that gold falling this much is really telling us something, a sort of canary in the coal mine if you will: Strong deflationary forces are at work and central banks are powerless against them. Stock markets and other risk assets will follow suit.

  • benwood:

    I wonder why James Debevec does not recognize April 14th or April 15th as an oversold date (or dates)? And if they were omitted because the lows were grossly breached, then how many other dates were omitted using the same retroactive criteria?

    • Hi Benwood: Debevec only looked at gold stocks. His criterion is how far below the 252 day (one year in terms of trading days) moving average they are trading. He simply looks at the ratio of the XAU to its 252 day moving average value. When it goes to 60 or lower, the long term buy signal is given. This is independent of the action in gold itself.

  • Rusty Brown:

    I’m confused by the apparent contradiction in the following two quotes taken from this analysis:

    “…investors with a longer time horizon probably won’t make a big mistake by buying on weakness.” and

    “…long term oriented investors probably won’t make a mistake if they decide to buy on weakness.”

    RB

  • jimmyjames:

    as it appears now that the recent back and forth was not a bottoming formation, but rather a continuation formation

    ***************

    http://static4.bigstockphoto.com/thumbs/1/9/3/large2/39181114.jpg

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