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.




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





We are happy to report that our funding target has been reached – once again, a hearty thank you to all contributors, your support is greatly appreciated!

As a result of us having gotten from A to B, the annoying graphic is hereby retired. However, be aware that the donations button continues to exist. It is actually perfectly legitimate to use it during the non-funding season as well; assorted advantages we have listed that often result from doing so are likewise persistent (i.e., increased happiness, children including you in their songs, potential obtaining of privileges in the hereafter, etc., etc.). Unfortunately we can't promise that it will make the gold price go up, but we're working on that.

Thank you for your support!


To donate Bitcoins, use this 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:

  • underpass-libraryThe Baby Boomer Survival Guide (Part I)
      The Yellow Machines Go Silent PARIS – What should you do if you are running out of time and money? This is the question we get from readers over 50… over 60… and sometimes over 70. We baby boomers were famously “na… na… na… live for today.” Now, it’s tomorrow. And many of us – often through no fault of our own – are having trouble making ends meet. At the Diary, we write about the world of money. About economic policy and how it affects you. But what if,...
  • US-winds-down-quantitativ-012Faith in Central Banks Dwindles
      Even Bloomberg Notices that Something is Amiss As anyone who hasn't been in a coma knows, assorted central bank interventions have failed to achieve their stated goals over the past several years. A recent article at Bloomberg focuses on their failure to reach their “inflation” targets. Of course, this particular failure is actually reason to celebrate, as it means that consumers have at least been spared an even sharper decline in their real incomes than has been underway in spite...
  • 3 EURO FRONTEU Moloch in a Fresh Bid to Inflate
      Brussels Alters Capital Requirements to “Spur Lending” Saints preserve us, the central planners in Brussels are giving birth to new inflationist ideas. Apparently the 2008 crisis wasn't enough of a wake-up call. It should be clear by now even to the densest observers that a fractionally reserved banking system that flagrantly over-trades its capital is prone to collapse when the tide is going out. 2008 was really nothing but a brief reminder of this fact. The political and...
  • U.S. Rep. Ron Paul (R-TX) speaks during the Republican Leadership Conference in New Orleans, Louisiana June 17, 2011.  REUTERS/Sean Gardner (UNITED STATES - Tags: POLITICS)Tell us Ron, What's the Plan, What's the “Austrian” Plan?
      What? No Austrian Prescription? Bloomberg Reporters Cannot Believe It This is truly funny. Ahead of the FOMC decision, Ron Paul, who is well-known as an an implacable critic and enemy of the Fed and a fan of the Austrian School of Economics, was interviewed at Bloomberg as to “what the Fed should do”. What makes it so funny is that the Bloomberg reporters seemingly cannot believe that Austrian economists simply have no “prescriptions” for the Fed. They keep pushing Ron Paul for...
  • Stockholm-Protest-BannerRefugee Crisis Blowback
      A Sharp Turn in Swedish Politics When we recently discussed Europe's refugee crisis, we mentioned that a sizable political backlash was to be expected and that unfortunately, extreme nationalist parties were likely to be among the main beneficiaries. We also mentioned the situation of Sweden, where the mainstream political parties in an ongoing fit of political correctness bordering on lunacy have apparently decided to transform Sweden into a province of Mesopotamia.   Leader of...
  • St._Benedict_delivering_his_rule_to_the_monks_of_his_orderThe Baby Boomer Survival Guide (Part II)
      A Lehman Moment for Commodities? LONDON – Today, we continue our philosophical look at what you should do if you are running out of time and money. (You can catch up on Part I here.) Where do we begin? With how to add wealth? Or how to lose it? The way to lose it is simple. You buy something that is not worth the money you paid for it. You are instantly poorer, whether you know it or not.   The pleasingly plump. Illustration by jdeer69     DJIA, daily...
  • SwanUS Stock Market: A Retest or Worse?
      Gray Swans and Black Swans By Monday's close, the S&P 500 Index was closing in on the low established in the August swoon – such a retest was essentially our minimum expectation, as V-shaped rebounds are very rare. The question is now whether it will only be a retest, or if something worse is in the offing. No-one knows for sure of course, but we'll briefly discuss what we are looking at in this context.   Image via NYTimes   It is interesting that as the market...

Support Acting Man


Own physical gold and silver outside a bank

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


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!