A Negated Breakdown

There have been remarkable gyrations in the gold sector lately. The typical rebound out of a November/December low (typical in recent years after the end of the tax loss selling period) was initially cut short in January in the course of the global stock market decline. This was a bit surprising, because it was widely held that the recovery in the gold price was a result of said stock market decline.

 

goldmine-700x360Photo via genius.com

We suspect that in it was initially still widely expected that stock market weakness was just a fluke and that the downtrend in the gold price would therefore soon resume. Moreover, base metal mining stocks were pounded mercilessly and as we have previously discussed, there is a completely illogical short term correlation between this sector and gold mining stocks, likely due to various tracking products and the mindless automatic buying and selling associated with them. From a technical perspective the action has created quite an interesting situation though:

 

1-XAU-HUI breakdown and reversalXAU and HUI daily. After initially beginning to recover from November, resp. December lows, both indexes sold off sharply after the first trading week in January, and in the process broke below a previous support level that has been tested many times and has up to that point always held. It looked like yet another breakdown in the long-lasting bear market was underway – but the indexes quickly reversed back above the broken support line – click to enlarge.

 

As the chart annotation indicates, the recent reversal is definitely positive. Both false breakouts and false breakdowns often turn out to be reliable trend change signals. An additional bonus in this case was that the initial breakdown has induced widespread capitulation (judging from anecdotal evidence).

 

Advance in Gold Characterized by Caution

What looks encouraging as well is the recent saucer-shaped bottom in gold – usually this kind of formation leads to a fairly decent rally:

 

2-Gold saucerGold begins to rise out of a saucer-formation – click to enlarge.

 

Contrary to the immediately preceding rally attempt, the current one has been a “scared rally” so far. There has been fairly little speculative buying in COMEX futures, and small speculators have actually remained net short up until last week, when their net position turned roughly neutral.

 

3-Gold CoT-1Speculative buying in COMEX gold futures has so far been far more subdued than during previous rallies – click to enlarge.

 

The mainstream financial press is still busy penning obituaries on gold, which is generally a good sign as well. A playable rally should be widely disbelieved in its early stages. According to the article we have linked to “many still don’t see a bottom”, but in terms of major non-dollar currencies it has of course occurred a few years ago already. In numerous EM currencies gold has in fact attained new all time highs, but even priced in major developed market currencies the performance of the gold price continues to diverge significantly from that in USD terms.

 

4-Gold in yen and euroGold in yen and euro. There wasn’t even a bear market in yen terms, merely a correction – and it bottomed in mid 2013. In euro terms the gold price has bottomed in late 2014 and appears to have put in its third consecutive higher low recently. If it manages to exceed its early 2015 interim high, it will be legitimate to speak of a new bull market – click to enlarge.

 

In developed market commodity currencies like the Canadian dollar and the Australian dollar, gold has bottomed in mid 2013 as well and has gained significant ground since then.

As we have remarked in a previous update on the sector, we don’t like it when gold rises for a “reason”, and we found it a bit unsettling that a consensus seemed to have emerged that the gold rally was primarily considered a result of the stock market sell-off.

However, so far it has continued to hold up quite well, in spite of a not overly dovish sounding FOMC statement and a rebound in stocks, so perhaps the gold market is actually beginning to look beyond these presumed correlations. It is a bit too early to judge though – a further short term rally in stocks or in the US dollar may well derail it again.

 

An Update on Divergences

There is one technical development that on the face of it argues for caution. Below is an update of the divergences between the HUI-gold ratio, the HUI and gold. Readers may recall that the last divergence that was put in seemed quite encouraging, as the HUI had failed to confirm a new low in gold. Now a third consecutive divergence has occurred – this time, the above discussed brief breakdown in XAU and HUI was not confirmed by the gold price. However, neither have the two indexes managed to confirm gold’s recent move to an interim high.

 

5-HUI-gold divergencesThe HUI-gold ratio, the HUI and the USD gold price – the series of non-confirmations continues, with the most recent one (illustrated by the red line) normally considered negative – click to enlarge.

 

As we have pointed out in “How to Recognize an Emerging Bull Market”,   usually major turning points are first signaled by strength in gold stocks and only later confirmed by a rising gold price. However, given the strange correlation between gold stocks and base metal mining stocks which has developed in recent years, one should perhaps not be too fixated on the indexes, especially as there are large disparities within the sector – numerous stocks are notably lagging and underperforming, while others are performing quite well.

If one looks at the two gold stocks with the biggest market cap and the greatest liquidity, one actually sees a perfect example of how things should be. Both ABX and NEM have begun to rally well before gold made its low and have built quite decent looking bottoming patterns in the process. Both have not confirmed the new lows in XAU and HUI in mid January. ABX looks especially strong:

 

6-ABX and NEM vs GoldABX, NEM and the gold price – this is a classic bullish divergence – click to enlarge.

 

On the other hand, GG and RGLD are examples of large cap gold stocks with a fairly strong institutional following that have performed very poorly, so on the whole it is a mixed bag.

 

7-GG and RGLDGG and RGLD – two major gold stocks that have performed very poorly – click to enlarge.

 

As we have stressed late last year, bottoming processes in the sector are always tricky (see 1992-93 as a pertinent example). It could well be that things are simply especially tricky this time around. Naturally, we can by no means rule out yet that the rebound is just another flash in the pan – that will only be possible once the HUI actually overcomes its 200 dma and manages to hold above it.

 

South African Gold Stocks vs. the Rest of the Sector

We have discussed Harmony Gold in early December after the company had suddenly paid down a hefty chunk of its debt, and the rand gold price broke out to new highs. We revisited South African gold stocks and the rand gold price again in early January (see “The Canary in the Gold Mine” for details). In the meantime, gold in Rand has surged even further, as the rand up until recently weakened quite a bit more in concert with other EM currencies. As a result this sub-sector has delivered an excellent performance – as the combination of fundamental developments and chart patterns a few weeks ago indicated it would.

 

8-South African Gold StocksThe three South African gold miners that have benefited the most from the weaker ZAR, as most or all their producing assets are located in SA – click to enlarge.

 

However, it seems to us that the time is ripe for at least a short term correction or a consolidation in these particular stocks. If last week’s rebound in oil prices/ industrial commodities and stock markets continues for a while longer, EM currencies are bound to strengthen. As you can see below, the Rand has in fact turned up against the USD last week from extremely oversold levels (shown as “overbought” in USD/ZAR), and the Rand gold price has begun to correct accordingly:

 

9-Rand gold price vs USDZARThe Rand gold price and USD/ZAR – click to enlarge.

 

Keep in mind though that these stocks have historically tended to add to their gains after such an initial correction, even if gold in Rand only proceeded to move sideways in a new, higher range. This may be because some investors only react once the first earnings results reflecting the move in the Rand gold price have been released. So it seems worth keeping an eye on these stocks.

In the meantime, it could well be that certain laggards in the sector are actually poised to do something analogous to what these stocks have done. Consider for instance the ratio of Canadian gold mining form Kinross (KGC) to HMY. It certainly argues in favor of mean reversion. The chart of KGC by itself looks awful – but so did that of HMY when it approached its low. Another important similarity is that the market fails to reflect a number of positive fundamental developments in KGC’s case as well at present (we will discuss this particular stock in more detail in a separate post).

 

10-KGC-HMY ratioThe ratio of KGC to HMY has moved from one extreme to another – perhaps the time for a mean-reversion has now come? Many Canadian gold stocks have been extreme laggards, and in a number of cases it is not quite clear why – click to enlarge.

 

In short, there may be a few opportunities to redeploy funds from one group of stocks within the sector to another group that still appears to have catch-up potential. As an aside, many silver stocks have also been beaten down a lot and may therefore have bounce potential, but as long as economic confidence is weakening, gold should continue to outperform silver, even though silver is historically cheap relative to gold.

 

Conclusion

In spite of the sector continuing to try the patience of investors, a number of positive things have happened lately – but as so often, it is a mixed bag, as a few short term technical warning signs are in evidence as well (see the discussion of divergences above). Whether a sector-wide trend change is in fact beginning remains of course uncertain until certain technical preconditions have been met (such as overcoming lateral resistance levels and the 200 dma).

However, as we have previously argued, even short term rebounds that are subsequently surrendered again are worth playing in this sector due to its enormous volatility (consider e.g. that HMY has rallied nearly 300% between late November and late January; not too many stocks manage to do this in just two months). At some point there will be a sector-wide rally that will turn out to be the “real McCoy” and we will certainly comment if/when that happens. Note as an aside that the fundamental macro backdrop for gold itself has improved of late.

 

Charts by: StockCharts, SentimenTrader

 

 

 

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

   
 

5 Responses to “Gold and Gold Stocks – A Meaningful Reversal?”

  • Hans:

    A good time for those with a gain or those with a
    serious drawdown, to close their position(s).

    Au will retest it’s low of 1045 this year.

    • All-Your-Gold-Are-Mine:

      The problem with your advice is that you and almost every other person on the planet believe Gold is headed back down to restest the low or even lower… a quick study of history reveals that is how bottoms are made. The bottom is already in… sit back and relax… enjoy the ride for those of us that backed up the truck at the lows!

      • Hans:

        AYGAM, we shall see. There is little in terms of any current
        financial crisis or instability which will drive buyers to bid up the metal.

        I do believe Au time will come again but that could be some
        four years down the road.

        BTW, from 2006 to 2012, my principal stock holdings where
        in Au and Ag.

  • sriechers:

    Add HUI and GDX to the list…

  • The gold paper share market (GLD) is sporting serious gaps…

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Survive the Winter
      A Flawless Flock of Scoundrels One of the fringe benefits of living in a country that’s in dire need of a political, financial, and cultural reset, is the twisted amusement that comes with bearing witness to its unraveling.  Day by day we’re greeted with escalating madness.  Indeed, the great fiasco must be taken lightly, so as not to be demoralized by its enormity.   Symphony grotesque in Washington [PT]   Of particular note is the present cast of characters. ...
  • Credit Spreads: The Coming Resurrection of Polly
      Suspicion isn't Merely Asleep – It is in a Coma (or Dead) There is an old Monty Python skit about a parrot whose lack of movement and refusal to respond to prodding leads to an intense debate over what state it is in. Is it just sleeping, as the proprietor of the shop that sold it insists? A very tired parrot taking a really deep rest? Or is it actually dead, as the customer who bought it asserts, offering the fact that it was nailed to its perch as prima facie evidence that what...
  • The Strange Behavior of Gold Investors from Monday to Thursday
      Known and Unknown Anomalies Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals...
  • A Falling Rate of Discount and the Consumption of Capital
      Net Present Value Warren Buffet famously proposed the analogy of a machine that produces one dollar per year in perpetuity. He asks how much would you pay for this machine? Clearly it is worth something more than $1.00. And it’s equally clear that it’s not worth $1,000. The value is somewhere in between. But where?   We are not sure why Warren Buffett invoked a money printing machine of all things – another interesting way of looking at the concept is by e.g....
  • Business Cycles and Inflation – Part I
      Incrementum Advisory Board Meeting Q4 2017 -  Special Guest Ben Hunt, Author and Editor of Epsilon Theory The quarterly meeting of the Incrementum Fund's Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is...
  • What President Trump and the West Can Learn from China
      Expensive Politics Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.   President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT] Photo credit: AP   The President’s trip to the Far East came on the heels of the completion of China’s...
  • Is Fed Chair Nominee Jay Powell, Count Dracula?
      A Date with Dracula The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.   “Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver's seat it was evidently hard to understand what was said over the racket made by the team of...
  • Business Cycles and Inflation, Part II
      Early Warning Signals in a Fragile System [ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning] We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 - 24 months were quite large, even if their absolute levels remain...
  • A Different Powelling - Precious Metals Supply and Demand Report
      New Chief Monetary Bureaucrat Goes from Good to Bad for Silver The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.   Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor...
  • Heat Death of the Economic Universe
      Big Crunch or Big Chill Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.   OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in...
  • Claudio Grass Interviews Mark Thornton
      Introduction Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens. A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend...
  • Precious Metals Supply and Demand
      A Different Vantage Point The prices of the metals were up slightly this week. But in between, there was some exciting price action. Monday morning (as reckoned in Arizona), the prices of the metals spiked up, taking silver from under $16.90 to over $17.25. Then, in a series of waves, the price came back down to within pennies of last Friday’s close. The biggest occurred on Friday.   Silver ended slightly up on the week after a somewhat bigger rally was rudely interrupted...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

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

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]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com