Gold Stocks Decouple

There are now preliminary signs that the enormous decline in gold and gold stocks could at least be in for a pause. Before we continue, allow us to point out that such signals have appeared several times in the course of the downturn and later turned out to have been traps, so take what follows with a grain of salt.

The current signal exhibits a few qualitative differences to previous ones. The first and probably most important difference is what occurred in Wednesday's trading. In spite of gold declining by yet another $30 and closing slightly below the $1,200 level, the HUI index rose by almost 5 points, closing near the highs of the day even as gold itself closed right at the day's lows.

Of course it may have been nothing but a one-day wonder, but it was notable that the gold stocks diverged positively on what was really a huge down day for gold. That has not happened on occasion of the previous divergence-type signals.

This morning after the COMEX open, gold decline by yet another $9, to $1190. However, the HUI index spent only a brief time in slightly negative territory and moved higher without hesitation right from its opening print. By doing so, the index has now closed the gap that was left after Wednesday's big $50 decline in gold. That gap may therefore have been an exhaustion gap. Let's look at a few charts:

 


 

HUI-15 miniuteA 15 minute chart of the HUI, showing the action of the past 5 trading days (includes only the first two hours of Thursday's trading) – click to enlarge.

 


 

 

 

 

As you can see, the HUI has recovered the entire decline that accompanied the  more than $80 swoon in gold between Wednesday and Thursday. That strikes us as rather significant. Of course, at the time of writing, Friday isn't over yet, so by the end of the trading day things may look different again. But somehow, it doesn't 'feel' like that will happen. Here is the same chart, with a comparison to GLD thrown in:

 

 

 

 


 

HUI-15 miniute+GLDEven though the HUI has recovered smartly from the most recent big down day, GLD (the yellow line – it is a good proxy for spot gold) hasn't really gone anywhere - click to enlarge.

 


 

Next up is a chart that shows the gap that was left on the daily chart on Wednesday and has now been filled:

 


 

HUI-daily, exhaustion gapThe HUI, daily. The big question is now whether Wednesday's gap down was a so-called 'exhaustion gap'. These are gaps that appear near the end of a decline (or advance) and as the name implies, indicate an 'exhaustion' of selling – click to enlarge.

 


 

Another way of looking at this is the HUI-gold ratio, which has moved up after making new lows earlier this week:

 


 

HUI-gold ratio

The HUI -gold ratio has plunged to a new multi-year low this week, but has begun to move higher again over the past two trading days – click to enlarge.

 


 

The Action in Gold

Gold itself has now also moved up from its earlier lows – that always happens when the gold stocks fail to confirm a large move down. However, the chart of gold itself gives us no indication yet that the bear phase is truly over. All we know for certain is that sentiment in gold, silver and gold stocks has recently been at its most bearish in 13 years – it was almost as bearish as at the absolute lows of a 20 year bear market in the year 2000.

Of course this bearishness was partly justified by the price action – sentiment always follows prices after all. However, we have recorded extremes in gold sentiment for many months now. Should this sentiment extreme unwind, it could provide the fuel for quite a rocket ride higher. We are not there yet though. As can be seen from this chart posted by 'The Short Side of Long' blog, the 1975-1976 correction/cyclical bear market was a great deal deeper than the recent correction has been thus far.

That does of course not mean that the current bear market has to be of the same size. It could well be smaller – but, as TSSoL rightly points out, it could just as well turn out to be bigger. We doubt it will, but one must be open-minded when it comes to markets – they always tend to overshoot after all (one just has to be careful not to become so open-minded than one's brain falls out).  Gold has yet to overcome even initial levels of resistance:

 


 

Gold, one week1Gold, 30minute candles, with the 'unconfirmed low' highlighted – click to enlarge.

 


 

Conclusion

So what can we conclude? For one thing we can certainly conclude that there has already been an 'overshoot' in the gold stocks. As we have pointed out with respect to 'long term oversold' signals, once gold stocks become as oversold as they have recently been, the historical record suggests that a rally of between 55% to 550% can be expected to start from the eventual bottom.

Moreover, we know for a fact that gold stocks most of the time tend to lead gold. This is very likely simply a result of the fact that the people who buy gold futures in many cases are also trading gold stocks. It would make sense for them to load up on gold stocks before they move into gold futures in size. Therefore, every serious divergence that appears could be a sign of an impending trend change. Whether this will be just a short term trend change, a medium term one or a long term one remains to be seen. Certainly the technical damage to date suggests that it will take some doing and a lot of  back and forth before the sector truly gets back on its feet.

However, what we cannot firmly conclude yet is that the cyclical bear market is over. The evidence is just too flimsy to come to that kind of conclusion at this point. There are many alternative possibilities worth considering:  the gold stocks may simply be subject to some short covering. There may be some shenanigans going on related to end-of-quarter window dressing. It may simply be a pause, relieving oversold conditions before the long term downtrend resumes.

It is therefore simply not possible to sound the 'all clear'. However, as we have emphasized previously, anyone buying at these levels with a very long term time horizon probably won't make a mistake. The major fundamental trends that have supported the gold bull market have not changed – although there have certainly been a number of medium term gold-bearish fluctuations in the support previously provided by negative real interest rates, credit spreads and forever rising US budget deficits. However, these fluctuations have in our opinion not truly altered the long term outlook. The painful measures that would be required for long term solutions of the problems besetting the global economy have not been taken and are unlikely to be taken in the foreseeable future. It seems far more likely that what government will resort to will be measures that are inherently gold-bullish.

With regard to the recent 'signs of life', let us watch and see what develops. It certainly could be that we have just seen a major trend change, even though we have to reserve judgment on that for the moment. Nevertheless, the divergence we have just observed is no doubt quite noteworthy. It is precisely the type of divergence we would expect to see once the medium to long term trend does in fact change.

 

 

Charts by: BigCharts, StockCharts, BarCharts


 

 

 

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12 Responses to “Gold and Gold Stocks – Signs of Life”

  • worldend666:

    Hi Jason

    You know how these pennants work. It will break in one direction, and create a new pennant. Wait and see. Oil might go to 120$ and then swing back to 80 and a new pennant will have been formed, but with 2007 as the beginning.

    • JasonEmery:

      Hi world,

      Crude, at $99.57 (kitco) has taken out the June high. The June high represented an inconclusive, temporary breakout from the resistance at $98/bbl. This pretty much confirms that the June high wasn’t a fluke.

      In and of itself, this is no big deal, sort of what you mentioned. But in the context of going in the opposite direction most other asset classes, it just seems like it might be the vehicle of choice to hide from the activities of the Central Planners, lol.

      • worldend666:

        Yes perhaps – too big a market to manipulate. There is always the likelihood of reversion to the mean though. I would be inclined to stick with gold at these levels and wait for it to catch up with crude.

  • jimmyjames:

    If demand is supposedly falling and production increasing, oil price ought to be plummeting – and it ISN’T. In fact, as noted, it’s recently been shrugging off piece after piece of supposedly bearish data. If you look at the charts of oil and the US$ from 2008, it becomes instantly clear that oil ran to $150 precisely BECAUSE the $ was collapsing at the same time back then.

    ***********

    I would guess that the oil price hinges more on dynamics such as mid east tensions than it does on dollar strength or weakness at this point in time- because demand across the world is falling and oil is priced in every currency- the USD price is only a world benchmark price-

    http://tinyurl.com/nbb6rs6

    In fact most prices are falling against the dollar

    http://advisorperspectives.com/dshort/charts/inflation/headline-core-comps.html?PCE-headline-core-since-2000.gif

    http://tinyurl.com/ogs8ch7

    Shouldn’t the gold price have been going up instead of down if a dollar crash is imminent?

    I agree that the 150 spike in the oil price was a blow off and the fall to 33 was overshoot but looking at the oil price today-to predict a dollar crash when the oil price is at the same level it was 5 years ago doesn’t make a lot of sense to me-

    • ManAboutDallas:

      I guess you don’t live in the Real World, “jimmyjames”, but hey everybody’s got to live somewhere.

      • worldend666:

        That’s pretty harsh. Oil volatility is positively pedestrian these days compared to the last 5 years and the pennant could continue another 5 to 10 years before making a decisive break in either direction.

        • JasonEmery:

          world said, “…the pennant could continue another 5 to 10 years before making a decisive break in either direction.”

          What? Are we looking at the same chart? I’m looking at stockcharts dot com, symbol $wtic, three years of data graphed. The pennant in the dollar price of benchmark W. TX crude has reached the end of the pattern. Within a few months (weeks?) it will break up or down out of the pennant. These kind of things don’t go sideways indefinitely.

          Also note that the chart for the oil:natural gas ratio ($WTIC:$NATGAS) is back up to 27:1. On a btu equivalent basis, the ratio is 7:1, so oil is fetching a 300% premium to ng, signaling intense fear of hyper inflation. At the height of deflation fears, in early 2009, this ratio plunged to 6:1, below par, as one would expect.

          Sometimes oil and gold move together, sometimes they don’t. Oil did not confirm the recent drop in gold, so I’d say it means little, given the relatively small size of the gold market.

  • worldend666:

    Did anyone notice gold made a perfect bounce off the 0.618 Fibonacci level on Thursday night?

    From the peak of 1915 USD gold descended exactly 38.2%, bouncing off 1180 USD. The exact Fib level would have been 1915*61.8% or 1183 USD.

    I pointed this out on another forum before the rally on Friday morning and was not surprised to see a nice rally later in the day. I wish I had waited for this but I am as guilty as everyone else of thinking the decline could not be so deep. Having seen this bounce, though, I have to say it certainly looks good to me.

  • JasonEmery:

    Jimmy–I think that ‘manabout Dallas’ is correct. The $150/bbl print was a temporary, short squeeze spike.

    You can’t run deficits of 40% of GDP for long. That why we’re under performing the Euro for the last couple of years. We’re already collapsing!!!

    Of course ‘dallas’ is talking about hyperinflation, and there is no telling how long it will take to get there. Maybe they can just manage the dollar/Euro complex lower, in part through managing the gold price, and perhaps they cannot.

  • jimmyjames:

    And oil is giving us the early clue that what we’ve been waiting for – as if it were Godot – is imminent : the collapse of the US$.

    **********

    Oil was $150 five years ago and the dollar was where it is now (USDX)
    Today oil is trading $90/100-
    Oil demand is falling and production is increasing (US)
    Can you explain your logic in calling for an “imminent” USD collapse today?

    • ManAboutDallas:

      If demand is supposedly falling and production increasing, oil price ought to be plummeting – and it ISN’T. In fact, as noted, it’s recently been shrugging off piece after piece of supposedly bearish data. If you look at the charts of oil and the US$ from 2008, it becomes instantly clear that oil ran to $150 precisely BECAUSE the $ was collapsing at the same time back then. The knee-jerk flight to the $ during the Financial Demolition Derby of 2008 and the spectre of deflation extant then also put the pin to the oil price bubble. Oil is priced worldwide – for the moment – in US$. That the nominal $ price is quietly rising when it “shouldn’t be” is the clue that more and more $ are needed for the same amount of oil. For the moment, oil is the thermometer of the health – or lack of said same – of the US$, and it’s saying “Fever rising!”.

  • ManAboutDallas:

    There’s was quiet-but-persistent support for a possible turn in PMs from another commodity last week : oil. For the past week-and-a-half there has been a steady stream of ostensibly-bearish data points coming from the oil market, and the oil market has shrugged them all off after the obligatory knee-jerk “sell”. A look at oil’s long-term daily chart shows a magnificent double-pennant forming and almost complete, with what seems will be an upside resolution, through and beyond $100/bbl. It seems that in the face of the “paper price games” being run in the PMs, oil is standing in for gold as the “early warning” signal. Why would this be so ? Because oil is a “consumed” commodity, whereas gold is a “hoarded” one. This means oil will be less susceptible to price manipulation because the market simply must have true price discovery as a “consumed” commodity. “Wanna overpay for that barrel of crude, there, ‘Sparky ? Sure, here ‘ya go, and I’ll even throw in the deed to the Brooklyn Bridge as a bonus.” And oil is giving us the early clue that what we’ve been waiting for – as if it were Godot – is imminent : the collapse of the US$.

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