A Plethora of Bearish Pronouncements

As one frustrated commentator remarked after the umpteenth warning in the mainstream financial media that gold can only go down and should be avoided at all costs:

 

“For something so irrelevant (especially in terms of market cap) why on earth are you people devoting so much time to bashing it? The collective market cap of all gold, silver, platinum, palladium and associated miners is truly, truly trivial when compared to other categories, like tech stocks, bank stocks and probably, even BitCoins!”

 

That is indeed a good question. Here is for instance Marketwatch reporting on a call courtesy of Barclay's yesterday: “Don’t get fooled by gold again”. Somehow we don't think too many people who invested in gold feel overly 'fooled' by it, just because there was a big correction after 12 years of gains. Barclay's seems to have forgotten that the measure of when people invested in gold is not the time period when its own analysts finally noticed that a bull market was apparently underway. Again, we recall vividly that a great many mainstream houses never even mentioned gold before it was well above the $1,000 mark, with quite a few of them becoming extra-bullish above $1,500. It is all on the intertubes, so they cannot claim otherwise (note: we have not followed Barclay's calls in particular, but their current pronouncement is in no way different from that of every other mainstream financial institution, so this by itself represents evidence that they are simply following the herd).

The above highlighted cri du coeur from an investor who is by now apparently slightly aggrieved by the constant hammering home of negative messages on gold was posted in reaction to this interview one Bob Doll gave to Jeff Macke. Doll informs us 'why the drop in gold isn't done yet'. To which we say, perhaps, but we doubt his knowledge of the future is any better than that revealed by our own cloudy crystal ball. His level of conviction clearly is on a different plane from ours.

We were incidentally able to find one of Doll's past market predictions (the intertubes strike again!), namely his stock market prediction for the year 2008:

 

Stocks achieve a new all-time high in 2008 as price/earnings ratios improve. Equity valuations (i.e., P/E ratios) have improved only modestly since mid-2006 after experiencing several years of declines. We believe there is room for further improvement, particularly given our view that earnings are likely to be weak. The combination of attractive valuations, positive (albeit slower) levels of economic growth, subdued inflation, low long-term interest rates, strong corporate balance sheets and an accommodative Federal Reserve should help push stocks to a new high at some point during the year — breaking through the records last set in October.”

 

This demonstrates that even the best considered opinions about future financial market developments will occasionally turn out to be quite wrong – especially when one employs 'forecasting by ruler', i.e., looking at the most recent trends and simply extrapolating them. That works quite often, but it is likely to fail whenever it reflects a well ingrained consensus opinion.

Less than 1% of the world's investable assets are allocated to gold or gold related investments and the market cap of the entire global gold mining sector is less than that of a single US corporate behemoth like Apple, Google, Wal-Mart or Exxon. Considering that, it is indeed curious why so much ink is spilled on gold, especially ever since it has finally begun to decline in price (as an aside, it is still up by 400% from its low in 2000, a fact that is somehow always glossed over in these reports).

 

Gold Stocks Technical Conditions – Rise of the Living Dead?

There was not much to say about gold stocks recently beyond what we have already said, but a small 'technical victory' was achieved by the sector on Monday, quite possibly egged on by the announcement of the takeover of Osisko Mining by Goldcorp for $2.6 billion. Osisko owns a coveted asset  – a large open pit mine in Canada. However, anyone thinking a bit about the price at which it is taken over was probably wondering how it compares to the market capitalizations of a number of mid tier and senior gold mining companies that are more than just one-mine operations. We find that for instance, Iamgold's market cap is only $1.4 billion at present. The market cap of Goldfields with $2.4 billion is  also slightly below the value Goldcorp assigns to Osisko. Senior producer Kinross trades at just about two times the price Goldcorp is paying for one-mine Osisko. 

In other words, what this takeover underscores is how extremely cheap gold  assets have become (as we have pointed out in a recent update, gold stocks currently trade at levels relative to gold that have only been seen on two previous occasions, and those were prior to WW2). This is why we suspect the aforementioned 'small technical victory' may have been achieved due to the takeover announcement. Here is what we are referring to:

 


 

HUI,daily

The HUI index, daily: the initial level of resistance has finally been overcome – click to enlarge.

 


 

Actually, this has suddenly become a quite good-looking chart, even though the move from the lows is still small. Of course this could change again in a heartbeat, since the breakout has only just occurred. A single bad day could bring the situation back to 'unresolved' status. Moreover, there is obviously plenty of resistance above current levels. But every move has to start somewhere, and if the index were to keep moving higher, it would certainly completely confound the consensus discussed above. Markets are know for doing that occasionally.

The recent move has also pulled the HUI-Gold ratio up from the abyss a bit:

 


 

HUI-Gold ratioThe HUI-gold ratio is trying to recover again. RSI and MACD momentum lows have actually occurred in what is by now the distant past. The low of the ratio itself was recorded in early December – click to enlarge.

 


 

Conclusion:

Will it be yet another bounce that fails, or something more? It may be too early to tell, but the index has spent quite a bit of time essentially going nowhere and often when a market is doing its best to put people to sleep, exciting moves are about to happen. It is also noteworthy that the HUI managed to break above an initial resistance level on a day when the rest of the stock market suffered its worst single-day decline of the year to date. This confirms our suspicion that these markets will continue to be negatively correlated, so that a trend change in one of them will likely coincide with a trend change in the other.

 

Charts by: StockCharts


 

 

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3 Responses to “Gold is Dead They Say, But Price Action Improves”

  • No6:

    I am convinced that these markets are being manipulated, a good example being on the 6th Jan this month.
    It is obvious enough for even Bloomberg to comment on it yet there is no official investigation.
    The Fed has good reason to fear Gold now they are essentially trapped into debt monetisation. They also need to find 700 tons of Gold for Germany without increasing the price.
    Is it the Fed via its member banks?

  • Hello Pater, nice post as usual. Just for you to check out here is the link to my latest post on the subjet

    http://themarketsbullfighter.blogspot.com.es/2014/01/repaso-del-gdx-y-del-oro.html

    It is in spanish. You can use a translator or just enjoy the charts. Not much to say. Acording to Demark last Agust Gold and GDX did bar 9 of a TD SetUp Buy, but they do not perfected the move. That perfection came over in November, but just in GDX and Gold/€, not in gold/$. That divergence makes me doubt about the recent move out of the lows. But who knows. Time will tell

  • Calculus:

    Yep, ANY and ALL promising deposits are going to be bought up by the majors over the coming years as they’re not replacing what they’re pulling out of the greound. If they carry on as in the past the majors will shrink until they are minors. Other people liken it to a supermarket letting its shelves deplete without re-stocking, soon there won’t be a supermarket left.

    Is there further weakness in the price of Gold, could be, the trend is still down so that would be the likely route. However, markets never look as bad as when they’re on their lows and the gossip is never as bearish…

    So buy quality and sit on it, within a few years you should be well rewarded, and if the POG goes lower add to the shares with NO margin. Margin is the rope the banks will offer you to hang yourself.

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