The Order of Things in Gold-Land

In the gold sector one frequently encounters what we refer to as either bullish or bearish 'hooks'. Before explaining this concept further, we should note here that we actually fell for one of those after it had seemingly become slightly less reliable for a while. As it turned out, it made a strong comeback at a rather inopportune moment.

The remember the first time we discussed the concept on the old Kitco message board in 2001-2002 (before it was 'modernized' and virtually all the posters active at the time left). What was debated at the time was the fact that gold stocks routinely outperformed the metal from late 2000 to early 2002. Several people contended that this could not continue, and that unless the metal were to 'catch up' with the gold stocks, their rally was surely doomed (note that in spite of two huge bear markets that have since then occurred in the sector, the prices prevailing at the time have not been seen again).

At that time we began to refer to this phenomenon as a 'bearish hook' – it was the bull market's way of keeping people bearish and doubtful. What they didn't realize at the time was that the sector's performance was actually a leading indicator of the far bigger advances in the gold price that were to occur later. Interestingly, when these far bigger advances finally did occur a few years later, the sector promptly began to underperform the gold price. This was the prelude to creating the 'bullish hook' that was a hallmark of the recent severe bear market (and which we admit to having ignored or downplayed at what in hindsight was a rather crucial moment in 2012). The 'bullish hook' has the precise opposite effect of the bearish one: it keeps people bullish, because the metal itself appears to be staying quite firm even while the gold mining stocks sag and begin to underperform rather noticeably.

However, for the past nine months or so, we have repeatedly pointed out that since the gold stocks have so clearly led the decline in the gold price from its 2011 high, the one thing that would be a sine qua non precondition for a change in trend would be frequent occurrences of the opposite phenomenon –  a return of the 'bearish hook' in other words. Gold stocks need to outperform the gold price when it rises, they need to frequently ignore short term corrections in the gold price and clearly rise relative to the metal over time. In addition, we should quite often see instances of weakness in the sector at the open of trading, followed by strength near the close.

 

The Current Situation

Since the beginning of the year, all of these indications could indeed be observed. One of the most glaring examples was delivered in Tuesday's trading. In the wake of a more than $17 decline in the gold price before the market open, gold stocks opened down, but not down as much as one might have expected.  In spite of the gold price exhibiting rather lackluster performance throughout the rest of the trading day, they then managed to close in positive territory near the highs of the day.

So clearly, things are on track so far – the probability that the retest of the June low in gold in late December was 'successful' has now strongly increased. If indeed no additional leg down below this support level (at around $1,180) occurs, then the surfeit of extreme bearish sentiment in evidence last year and at the beginning of this year should eventually provide the fuel for a sizable rally.

There is only one caveat we have at this stage, and that is the fact that we are partly witnessing a reversal of last year's tax loss selling in the sector. Many of those who took losses in December in order to minimize capital gains taxes for the year are presumably repurchasing their positions, so the sector's strength is probably at least in part attributable to this activity.

However, should this show of relative strength continue for a while longer, it will be a strong sign that the turn from bear market to bull market has occurred. Note though that the gold sector will have to contend with a great many resistance areas that have been created in the course of the consolidation since late June 2013. The ease or difficulty with which these are tackled will also be informative. One probably shouldn't expect it to be a smooth ride though.

 


 

HUI-annotThe resistance zone the HUI has just overcome (blue dotted lines) should serve as support in near term pullbacks. However, a lot of lateral resistance (red lines) has been created over the past several months just above current levels. There will likely be a lot of to and fro before they are overcome, but we will have to wait and see about that – click to enlarge.

 


 

For short term traders, things have become quite simple: the support zone (blue dotted lines) can be used for a protective stop. They therefore have a very low risk entry point here. Only if this zone actually holds on pullbacks can we be fairly confident that a change in trend has indeed occurred.

Looking at the HUI-gold ratio, we can state the following: similar to the HUI itself, it has been in a consolidation zone for several months. A breakout from this consolidation zone to the upside would represent unequivocal confirmation that a bull market has begun. Conversely of course, a breakdown below the lower boundary would indicate a continuation of the bear market. One thing that strikes us as very positive about this indicator is that there has been what looks now like a 'false breakdown' in December (this is also analogous to the HUI itself). Such false breakdowns (or conversely, breakouts if they happen to the upside) are usually very powerful signals. Essentially, the market had every opportunity to decline further from a technical perspective, but it didn't take it – instead it has reversed back up into the consolidation zone. Such failures to follow through after breaks of major support/resistance are often encountered at major trend change points.

 


 

HUI-gold ratioThe HUI-gold ratio – turning up after a 'false breakdown' – click to enlarge.

 


 

Let us however stress again here that one should not expect 'smooth sailing'. In fact, it is likely (although it obviously doesn't have to happen that way) that the initial rally attempt will run into trouble and lead to a prolonged period of volatile sideways movement. However, if the trend has changed, there should at least be a slight upside bias evident over time.

One reason why we don't expect smooth sailing is of course the gold price itself, which has so far not shown any indication that it has turned up for good. In order to give us initial confirmation of a trend change, it would at least have to rise above the $1,260 – $1,280 resistance zone. As an aside to this, even if it does manage to rise above this resistance area, one shouldn't necessarily expect a very big rally this year. It seems more likely that if a low has been indeed been put in last year, a year of consolidation will be in store, at least until the seasonally strong period begins in the fall.

 


 

February gold, dailyFebruary gold contract, daily, with the initial resistance zone indicated – click to enlarge.

 


 

Conclusion:

The recent action in the gold sector, especially the fact that it is outperforming the metal itself, is a very positive development and has strongly increased the probability that a change in trend has occurred. However, as long as no breakout from the post June low consolidation zone has happened, such conclusions must still be regarded as tentative.

In addition, traders and investors must be mentally prepared that a lengthy and  highly volatile bottoming period could be in store, even if a trend change has happened and a new uptrend is underway. There is of course no iron law that states that things must play out in this manner. We only want to point out that it would probably be advisable not to get overly enthusiastic just yet.

Consider for example a similarly volatile stock market sector that has also gone through an extended bear market and recently bottomed out, the shipping stocks. Below we show a two year chart of NAT, a crude oil shipping company that is actually one of the financially more solid shipping companies (it has paid dividends on a regular basis, even during the recent deep recession in the sector). As you can see, it took the stock more than a year of consolidating near its lows, and there were both 'false breakouts' and 'false breakdowns' in evidence during that time. If the gold sector regains its footing faster than that, all the better, but one must be aware that bottoming periods after extended bear markets can sometimes be quite drawn out affairs that are putting the patience of investors to the test.

 


 

NATCrude oil shipping stock NAT – it took more than a year of sideways movement in a large and volatile range before the change in trend was finally confirmed by a significant breakout (and there is still a small chance that this breakout could also turn out to be a false dawn, although to our mind,  it looks like a fairly solid bottoming phase in the stock followed by a legitimate breakout) – click to enlarge.

 


 

 

 

Charts by StockCharts, BarCharts


 

 
 

Dear readers, we are greatly honored by your readership and sincerely hope that our special mixture of entertainment and education continues to add a little value to your lives. As you can probably guess, our blog is not really a giant commercial enterprise, for that its readership is too exclusive and small. Nevertheless, running it involves not only time and effort, but also monetary costs. We are therefore starting another fundraising drive. You can help us reach our funding goal by either donating directly via Paypal or via Bitcoin.

 

Thank you for your support!

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

 
 

3 Responses to “Gold Stocks – Still Looking Good”

  • DismalScienceMonitor:

    Calculus”(My bet is the miners strength this year was insider buying”) – if so, I could find no sign of it looking at SEC form 4’s- has anyone any hard evidence?

  • Calculus:

    My bet is the miners strength this year was insider dealing buying on the back of the Indian news. Buying Gold was one possible play but with the Miners pretty much all on all-time lows at the turn of the year (+ big short interest) the miners had the biggest bang for the buck.

    Just speculation though.

  • No6:

    Interesting that this possible turn around is not being reported at all in the MSM.
    What is being mentioned is the run down of physical at the COMEX. If Pater is right and we will possibly have a year of sideways movement in the Gold price, then this loss of physical to Asia is not important!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • HelloThe Stock Market in Trouble - How Bad Can it Get?
      A Look at the Broader Market's Internals We have previously discussed the stock market's deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively. When...
  • drop-water-gold-power-40854578Gold Stocks: A Playable Rally May Be Beginning as Junk Bonds Crater
      Gold Stocks Jump and Retrace 50% Last week we discussed the potential for a rally in the gold sector (see: “Gold Stocks at an Interesting Juncture” for details). Gold stocks jumped early in the week and then retraced almost precisely 50% of the initial move higher, in the process closing a gap that was left behind on Wednesday.   Image credit: dreamstime.com   Interestingly, for the first time in many months, there were three up days in a row prior to the...
  • gold rush copyA new Multi-Year High in Buying by Gold Sector Insiders
      Latest Data from INK Show A Huge Surge in Insider Buying As our friends at INK Research in Canada have pointed out to us, insiders at gold companies have made use of the recent sell-off in the sector to load up on shares to an extent not seen in many years.   Image source: bidness etc   The INK insider buy/sell indicator for gold stocks has peaked just one day after China's initial devaluation announcement at nearly 1,200%:   INK's gold insider sentiment...
  • oil_3136994bIs Crude Oil Close to a Low?
      Panicky Headlines Everybody knows that there is a never-ending glut in crude oil, right? Who knew about it a year ago? Not everybody, that much is certain. The problem with what everybody knows is of course that it is often not worth knowing.   Photo credit: Alamy   Today a friend pointed two articles out to us that have been published yesterday and today. Their headlines say it all. The Wall Street Journal writes “No End in Sight for Oil Glut” - and proceeds to...
  • panic-buttonThe Stock Market's Panic Potential
      The Odds Favor a “Warning Shot” Scenario - but there is a “But” As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market's increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather...
  • USDCNY(Daily)The Donald and China, or The Fallacy of Protectionism
      Not Every Populist Topic is Worth Exploiting For reasons that will forever remain a mystery to us, mercantilism and protectionism actually hold enormous popular appeal. The best explanation we can come up with for this phenomenon is that the support for such policies is based on a mixture of economic ignorance and relentless propaganda by vested interests over the past, say, four centuries. Still, it is almost comical that people are so vociferously clamoring for policies that can actually...
  • piggyReal Wealth and Phantom Wealth – Secular Boom and Bust
      The Things that Produce Real Wealth vs. Phantom Wealth Our friend Michael Pollaro, the keeper of long-term data on the true money supply and author at Forbes as well as occasionally a guest author on this site, recently sent us the following chart of a relationship he keeps a close eye on. It depicts the annual change rate in new orders for non-defense capital goods and compares this series to the Wilshire total market index.   Photo via...
  • rotoThe Economy is in Liquidation Mode
      Capital Consumption If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business?   The birthplace of roller disco turned out to be edible, sort of Photo via...
  • JesusHuertaDeSotoJackson Hole – Meeting of the Physics Envy Brigade
      Planners Meet to Discuss the Impossible The Jackson Hole pow-wow takes place this weekend. A more revolting get-together of actual and armchair central planners (i.e., the advisors to the planners, many of whom see themselves as planners-in-waiting) could hardly be imagined. One has to wonder how much more damage they will be allowed to inflict before someone finally says “enough!”. The parlous state of the global economy and the series of booms and busts we have experienced over the...
  • post-mortemThe Stock Market After the Mini Crash
      A Post Mortem – the Influence of Black Box Systems Here is a brief update on the recent market action and what we think one should watch out for now. First of all, we already noted in our last market update that something about the recent “mini crash” was quite unusual. For one thing, it started to get serious in an options expiration week, which happens only rarely. One rather scary precedent is actually the 1987 crash: on that occasion the market declined sharply during expiration...

Support Acting Man

Archive

Own physical gold and silver outside a bank

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com