Gold –  A Short Term Support Level Is Violated

The lower rail of the near term support level in gold we have highlighted a few times before was broken on Friday. It took another huge sale in the futures market inducing a 'stop logic' event that briefly shut down CME trading to produce this support break (for details see this Zerohedge article). We have seen an amazing display of 'slam-dunkery' last week so to speak. First we had Goldman Sachs and virtually every other bank lining up at the same time announcing that gold was going to be a 'slam dunk sale' once the debt ceiling impasse was over with; then we got the first whiffs of an accord (as if that could have been a surprise to anyone!) and before you can say 'what happened',  gold is subjected to huge sales in electronic trading hours when volumes are small, causing 'stop logic events' and happening just at the right points in time to take out widely watched support levels. This was such a perfect dance, it had an almost orchestrated feel to it.

 


 

Gold, dec daily

Gold, December contract, daily – another short term support level falls – click to enlarge.

 


 

 

As can be seen from this chart, the break has so far only been small. Per experience, such small breaks are either reversed immediately (i.e., they turn out to be bear traps entrapping those that sold the support break), or failing that, a decline to the next support level takes place.

Here is a chart annotated by our friend B.A., which shows the flag formation in GLD and below it the equivalent formation in SLV – as well as the two potential head and shoulders necklines (of both the larger inverse and the smaller regular h&s formation) – it is another 'do or die' moment:

 


 

GLD-SLV-B.A

GLD- flag and two potential h&s necklines – below, SLV, which currently diverges positively from GLD – click to enlarge.

 


 

Gold Stocks – Close to Retesting June Low

The HUI's wedge-like decline has continued to extend, one small step at a time:

 


 

HUI-wedge
The HUI is approaching its June low – click to enlarge.

 


 

Although we cannot guarantee that this is going to prove meaningful again, we have noticed something interesting when looking at individual gold stocks with large weightings in the gold stocks indexes. One of the largest producers in the world, and an institutional favorite in the sector is Newmont Mining (NEM). This is now the third time in a row when NEM has made a lower low concurrently with the HUI putting in a slightly higher low:

 


 

NEMThree divergences between NEM and the HUI since July, indicated by the vertical red lines- click to enlarge.

 


 

B.A. has also provided us with an annotated HUI chart, noting that the recent wedge-like decline to retest the June low is very similar to the retest that occurred in 2008. Of course it does not look exactly similar – the 2008 retest was a bit more compressed in terms of time (it is shown further below). However, the basic elements are similar – a sharp pop higher from the low, followed by a slow decay in prices for the retest.

Of course we don't know yet with certainty whether the current action is really a 'retest' or the prelude to another break to still lower levels as B.A. points out below. However, given how close the index is to its June low, we very soon will know:

 


 

HUI-B.AThe HUI daily chart, annotated by B.A.: the slow decay of prices after the initial rally is very similar to what happened in 2008 – click to enlarge.

 


 

Here is the 2008 chart for comparison – the entire 2008 decline's fractal shape was in fact very similar to that of the 2011-2013 decline, with the main difference being that it was more compressed:

 


 

HUI-2008The 2008 wedge did not take as long to form, and volatility was generally higher that it is currently. The 2008 decline was generally more compressed time-wise, but contained very similar fractal shapes as the 2011-2013 decline to date – click to enlarge.

 


 

Lastly, here is an update of the still divergent GDM bullish percent chart which we have also shown in a previous update. At the June low and the preceding short term lows in April and May, zero percent of the stocks in the GDM sported a point & figure buy signal. Currently 26% of them still do, in spite the  decline in the gold stock indexes back to the June low:

 


 

$BPGDMThe GDM bullish percent index and the HUI continue to diverge – click to enlarge.

 


 

Not surprisingly, with gold still $90 above its late June low, the HUI-gold ratio has once again declined to new lows. With that, the ratio of the BGMI to gold (the BGMI is the gold stock index with the longest history) is at a new 72 year low.

 


 

HUI-gold ratioNew lows in the HUI-gold ratio mean that the broader BGMI-gold ratio is at a fresh 72 year low. In other words,  gold stocks overall haven't been this cheap relative to gold since early 1941 – click to enlarge.

 


 

Conclusion and a Few Remarks on Sentiment Data:

We continue to get one 'do or die' moment after another in the charts of gold and gold-related instruments. So far, the outcomes have obviously been bearish every time since the 2011 peak, but at some point that is bound to change, as the fundamental backdrop continues to be gold-friendly (note that not every aspect of the fundamental backdrop is – for instance, the declining federal deficit is probably viewed as a negative by market participants). Often it is precisely at those times when nothing seems capable of turning a market around that surprise changes in trend can and do occur.

Note that gold sentiment remains absolutely dismal. Recently Mark Hulbert's HGNSI (gold newsletter writer sentiment index) stood at minus 20 (meaning gold timers recommended a 20% net short position on average), while the daily sentiment index among gold futures traders (DSI) stood at 9 (all time low: 5).  Bearish sentiment in the sector rarely becomes as extreme as it is at the moment. Of course it has been quite negative for some time now, but the current readings are rather extreme even so.

A major reason why we continue to maintain that the fundamental backdrop remains gold-friendly even though the price action suggests a bear market is still in progress, is that we believe that mainstream analysts are quite mistaken when they assert that it is back to 'business as usual' in the economy. It clearly isn't.

After throwing trillions in newly printed money and deficit spending at the economy, all the authorities have to show for the effort – even using their statistical methodologies, which are designed to prettify the data – is the 'weakest recovery of the post WW2 era'. That alone should tell people that things are far from being 'back to normal' – quite on the contrary, it must be expected that the next downturn could be quite painful indeed. Since the monetary authorities are going to employ every trick in the book to avoid such a renewed downturn, they continue to be set on the doomed course of trying to print us back to prosperity. Sooner or later, the gold market will take note.

 

 

 

Charts by BarCharts, StockCharts, Bigcharts, B.A.


 
 

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13 Responses to “Gold and Gold Stocks: Broken Supports, Retests and Dismal Sentiment”

  • Calculus:

    Good point No:6. Whoever it is, and it might be a few separate entities, even the Chinese (force it lower to create supply and then buy the supply) is almost certainly making everyone know of their dominance and power.

    As you point out they’re almost telegraphing to any buyers – Buy and it won’t be too long before you regret your decision…

  • No6:

    Interestingly whoever is participating in these PM ‘slam dunks’ seems not to mind this being visible to all, almost like a mafia style warning to market participants.

  • Mark Humphrey:

    The miners are an unhappy lot, but nothing like the SA miners were in the mid seventies, when gold fell from $200 to about $100, and rioting in Sharpesville, SA threatened the miners. Kaffirs got decimated and the End seemed Near. It turned out we were near the end of the bear market.

    Today’s miners decline is modest, even cheerful, by comparison. So we may have further to go on the downside, to make this a gut wrenching correction in the big bull market. And since stocks may have quite a bit further to run on the upside, with Janet Yellen about to take over, gold stocks could continue to hurl themselves off the bridge. For a while.

    Really, this is an opportunity to gradually accumulate more. That sounds sickeningly sweet, I’m sure, to anyone who is really hurting.

  • No6:

    It must be obvious to all by now that coordinated market manipulation is taking place. I think even Doug Casey must be smelling something fishy.
    It defies all logic that at a time of unprecedented currency debasement the PM sector should be tanking. Doesn’t anybody in the Markets have any interest in history?

    The poor Hunt brothers must feel a sense of injustice.

  • Hans:

    Au, should have staged a very strong rally with the
    latest WDC fiasco (I am surprised the MSM is not using
    the word “crisis” as they always do), which failed to
    materialize…

    Intermediate bearish, with salmon declining to the 103 to 107
    levels..

  • Calculus:

    80% of thelong term bulls expect lower prices I would think.

    100% of bears expect lower prices, obviously.

    And probably 90% of innocent bystanders expecting lower prices.

    That puts the overall market’s expectations at about 95%.

    Can negative expectations get anymore extreme? Do markets ever go lower with such sentiment extremes AFTER already losing much value?

    Perhaps that means we’re around the lows and we’re going up!

    • worldend666:

      Jim Rickards suggested the US might sell gold to avoid raising the debt ceiling. I’m sure that is not on any gold bug’s radar yet and it would cause gold to tank massively.

      • For a number of reasons that is not going to happen. The main reason is that both treasury and Fed are convinced that maintaining the gold reserve is an essential component of the dollar’s reserve currency status. In fact, I believe the treasury has even commented on this fairly recently and pointed out that won’t sell its gold under any circumstances ( unfortunately I plain forgot where I read this, so I cannot provide a substantiating reference off the cuff, but it can probably be found by googling).
        Naturally, IF the US treasury were to decide to sell some of its gold, it would be significant psychological short term negative for the market, but the emphasis should be on ‘psychological’ and ‘short term’.

      • HitTheFan:

        It won’t happen.
        But if it did, let’s say they sold 2,000 tonnes.
        Who would buy and how quickly?
        What might they sell/stop buying to take the gold instead?

        Very short-term gold might fall, but almost immediately you would see gold revalued much higher, being ‘back in the game’ again.
        However, it ai’t going to happen, so moot point.

        • worldend666:

          It’s one of these examples where the short term supply/demand effect is counter to the long term significance of the event.

          No doubt gold would whither under the strain of heavy US selling but on the other hand it would be the signal that the US has no bullets left and this is a big positive for gold. My comment was only directed at the short term impact of a US gold sale.

  • jimmyjames:

    We continue to get one ‘do or die’ moment after another in the charts of gold and gold-related instruments. So far, the outcomes have obviously been bearish every time since the 2011 peak, but at some point that is bound to change

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

    The bane of my existence-
    Gold with its feral like instincts lies coiled- patiently waiting to shake out any and all fair weather believers-
    There will be a stampede into this play at some point in time in the future- unload your miners into strength and never part with the physical until it tells you to do so-

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