Technical Backdrop

If only we could get a dime for every bearish article on gold that has been published over the past two weeks…but one can’t have everything. When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, it if makes it to 90% down, it will still be a harrowing experience in the short term.

We like these catastrophes because they usually mean “the stuff is cheap and there is probably something people don’t see”. That’s definitely the case here, since one of the things that has been routinely ignored is the improvement in costs and cash flows that is slowly but surely progressing at many gold producers.

 

MponengGoing for the gold: rock driller at the world deepest gold mine, Mponeng, 40 miles from Johannesburg. You could stack 10 Empire State buildings on top of each other to cover the distance from its deepest point to the surface. It uses as much electricity as city of 400,000 people.

Photo credit: Graeme Williams / The Wall Street Journal / Redux

 

As always we will try to focus on slightly different things than in our last update on the sector, but there is one chart we want to show the current state of, namely our “divergences watch” chart.

 

1-Divergences, completeThe HUI-gold ratio, the HUI and gold. So far, the “double divergence” remains intact – with alternating diverging lows. The support on which the HUI sits looks a bit vulnerable because it has been visited so often, but positioning and sentiment are more than ripe for a good rebound – click to enlarge.

 

While we’re waiting for the turning point, we are always interested in the potential for tradable rallies until it happens, because they tend to be so big in this sector. Just look at the last move from 104 to 140 in the HUI – that’s as if the DJIA went from its current level of 17,792 points to 24,000 points in just two and a half weeks. Will it do that? We doubt it. The HUI can – and not only that: it can rally that much and still be a few light years below its 200 day moving average. In short, these “small bounces” are really gigantic, because prices are so compressed and the sector is so small and illiquid.

Below is another chart worth looking at again for a change, namely gold in terms of the two major non-USD currencies. We’ve added gold vs. commodities to it for the sake of completeness (and not least because gold has made a record high against them in 2015):

 

2-Gold vs. commodities and non_USD currenciesGold in terms of commodities, the euro and the yen. If one looks beyond the usual dollar-centric view, then gold is actually acting OK – not great, but OK. Except against commodities, relative to which it has put in a new record high this year – click to enlarge.

 

Sentiment and Positioning

The commitments of traders reports of the past two weeks have shown a swing in the net speculative position of more than 90,000 contracts (a 40,000 contract wing was recorded last week, shown in the table below, after 50K the previous week). Given that this has happened over just this short time span, we know that the vast bulk of the selling and short-selling since the most recent peak occurred at prices below $1,100. Readers may recall that we mentioned in our last update that this particular “give-up” was still missing in the data. Now it has arrived.

 

3-CoT tableLast week’s CoT report with the changes highlighted – click to enlarge.

 

As you can see, small speculators (“non-reportables”) have swung to a net short position again – for the third time since late 2014. In chart form it looks like this:

 

4-Gold CoT-chartGold hedgers net position (blue), which is the inverse of the total speculative net position, and small speculator net position (in red). This is the third time since late 2014 when small speculators have gone net short. The late 2014 occasion in turn was the first time this had happened in more than 14 years – click to enlarge.

 

We were actually curious when – apart from the two earlier occasions in 2014 and 2015 – small speculators were net short more than 5,000 contracts. So we looked. It happened on February 2 1993. Not only was that 22 years ago, it was also a case of bad timing.

Here is another sentiment/positioning related chart we haven’t updated in a while. It shows CEF’s discount to NAV (CEF is a closed-end fund holding gold and silver bullion) as well as Rydex precious metals assets and cumulative flows. Note, all these charts are telling us is that the mood is really very bad. This is however important, as it usually means there is limited downside and good short covering potential exists. The chart is a longer term one, which also shows that gold in dollar terms is very close to a lateral support level established in 2008.

Meanwhile, CEF’s discount to NAV is back to 11.4%, at the low end of its range and Rydex precious metals fund assets are down by roughly 92% from their peak. We can infer that interest in gold stocks is a tiny bit subdued at the moment.

 

5-Gold sentiment-1Gold vs. CEF’s discount to NAV plus Rydex precious metals assets and cumulative cash flows – click to enlarge.

 

A Blast from the Past

As an aside to all this, we recently worked out that an average of 557 tons of gold has traded in London every day over the past year. That’s not exactly peanuts. The annual size of the gold market is around $20 trillion. Now you know why it makes absolutely no sense to worry about mine supply or jewelry demand or whether India imports 200 tons more or less over an entire year, or any such nonsense, as the guys from the WGC and the CPM Group do. That’s just nuts.

However, we also wanted to show you a chart comparison we have discussed in the past. This time we have made the effort to actually splice an overlay together (inspired by our friend Dimitri Speck). As we have mentioned some time ago already, the gold market since 2000 has been an eerie copy of the 1970s gold market, only everything seems to be taking about twice as long. As it turns out, it is actually taking approximately 2.1 times as long (so far, anyway). The percentage gains and losses are almost similar – and so are the patterns.

Below is a chart aligning the late 1974 peak with the September 2011 peak – the mid 1970s bear market/ correction is stretched by a factor of 2.1:

 

6-Gold-peaks comparisonHand in glove: bear market since 2011 compared to a visually stretched version of the mid 1970s bear market.

 

The interesting thing about this is that the fundamental backdrop is in many ways quite different. For instance, no-one worried about deflation in the 1970s, while today that seems to be the only thing everyone is worried about – even while money printing continues at full blast, at least in Europe and Japan. The main reason for the time compression observed in the 1970s bull market (gold would go on to rise by another 850% from its 1976 low) is of course that the gold price had been fixed before Nixon defaulted (“temporarily” as he assured everyone) and axed the dollar-gold convertibility.

Anyway, this goes to show that the shape and extent of both bull and bear markets is often quite similar, as their fluctuations are driven by the short term decisions made by greedy and/or fearful traders at any given time. The reasons (or rationalizations) for the decisions don’t seem to matter in terms of these characteristics.

 

Conclusion

A number of potential short term triggers are dead ahead. The payrolls report comes in early December and in mid December we will find out if the Fed will finally grace us with the meaningless gesture of a 25 basis points (or maybe 12.5 basis points?) rate hike from the current level of zilch. The attention given to the former event is of course directly related to the latter.

As we have mentioned previously, the threat of a rate hike has done a lot of damage to the gold market in USD terms. The actual hike could easily become a “buy the news” event (the same was true of the end of QE3, which was greeted by a $200 or so rally if memory serves) – especially given the market’s current oversold and positioning/ sentiment status.

 

Charts and tables by: StockCharts, SentimenTrader, CFTC, St. Louis Federal Reserve Research

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • US Financial Markets – Alarm Bells are Ringing
      A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

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