No Correction Yet

Late last week the HUI Index broke out to new highs for the move, and so did the XAU (albeit barely, so it did not really confirm the HUI’s breakout as of Friday). Given that gold itself has not yet broken out to a new high for the move, it would normally be expected to do so, as Jordan Roy-Byrne argues here.

 

bogota-culture-museo-del-oro-1a.jpgPhoto via Museo del Oro / Bogota

 

The chart below shows the situation as of Friday (HUI, HUI-gold ratio and gold):

 

1-HUI, Hui-gold and USD goldThe HUI and the HUI-gold ratio have broken out above previous highs, while gold has not yet done so as of Friday… as we write this it is somewhat higher again intraday. Note that the HUI’s RSI has held above 50, and turned up again from there, which is generally considered bullish behavior – click to enlarge.

 

We have uploaded a daily chart of the XAU shortly after Monday’s open – this shows that while it had not yet confirmed the breakout on Friday, it was in the process of doing so on Monday, provided the breakout actually holds.

 

2-XAU, dailyXAU, daily: no confirmation on Friday, but it may be put in if Monday’s close is strong – click to enlarge.

 

If the breakout is indeed genuine, the former lateral resistance levels indicated in the charts above should turn into support; moreover, the gold price should indeed confirm the move by breaking out with a lag. There is still a technical “price attractor” for gold just above the $1300 level from a previous rally attempt that found resistance there in early 2015.

Why even harbor doubts about the breakout? One reason is that it is still fresh, although it certainly looks convincing so far. Another reason is the persistent correlation between the HUI-gold ratio and the XME (industrial metals stocks ETF) which we have previously discussed in these pages (see chart further below).  However, when we looked at the change in the sector’s character in late March, we also noted:

 

“[O]verbought conditions have so far been relieved by means of an upwardly skewed sideways move instead of a sharp dip. One can see this quite well on a 30 minute chart of the HUI that shows the action over the past three months. We haven’t yet given much thought to a possible Elliott wave labeling, but it seems to us that there has to be a “running correction” in there somewhere. This is to say, a corrective structure that exhibits an upside bias and is characterized by continuing the pattern of higher highs and higher lows.

This kind of correction is considered evidence of a very strong underlying trend, as it reflects the urgency of investors to get in.

[…]

A fairly sizable correction certainly wouldn’t be a surprise, but as long as short term support levels remain unmolested, it is still possible that a move to new highs will happen first.”

 

Here is a comparison chart showing the XAU-gold ratio, XME and the gold-copper ratio. Since mid-January, the former two have been in synch again, which indicates that gold stocks are since then driven by similar investor perceptions as other mining and commodity stocks (and emerging markets, for that matter).

 

3-HUI-gold vs XMEThe HUI-gold ratio, XME and the gold-copper ratio. Normally one would expect HUI/gold to correlate with gold/copper rather than with XME, but in recent years HUI/gold has tended the be more strongly correlated with the latter. After briefly decoupling between September 2015 to January 2016, the two have become realigned again after the mid-January low – click to enlarge.

 

This correlation is something one needs to be aware of. Since it currently still persists, it will presumably also be an important facet of the correction when it finally arrives. The perception driving all of these moves seems to have a lot to do with US economic weakness in Q1 – the Atlanta Fed’s GDPNow indicator has just declined to a mere 0.1% – and the conclusion that the Fed will therefore continue to stand pat with respect to rate hikes.

 

4-gdpnow-forecast-evolutionGDPNow for the first quarter has recently declined to just 0.1%

 

Consequently, many “anti US dollar” trades have gained in popularity, ranging from gold to emerging market stocks and currencies, commodity currencies (CAD, XAD, ZAR), commodities and the stocks of commodity producers. All of these are “relative value” plays as well – since these sectors were previously crushed, they have begun to look very attractively priced relative to various momentum sectors such as e.g. technology stocks (in the widest sense) or biotech stocks.

 

Gold Sentiment and Positioning

Last week we posted an article entitled “Gold – Still Misunderstood”, in which we said that we would soon discuss gold sentiment. In his WSJ article on gold, “A Warning for Gold Bugs: This Rally Won’t Last ”, Steven Russolillo inter alia asserted that sentiment on gold had become too bullish – which he sought to demonstrate by linking to a number of articles arguing the bullish case.

However, bullish sentiment always increases when prices go up. We recently posted links to a number of bearish articles in the context of the question of how to best interpret the commitments of traders report (scroll down to “interpreting the CoT data” for details on this). At any given time, one can find both bullish and bearish articles, with their relative preponderance largely dependent on the most recent price trend.

The question is though, what is sentiment really like? Most of the bearish views we have come across in recent weeks have focused on the CoT report and the large speculative net long position it shows (large relative to recent history). Recent examples of this can e.g. be seen here and here; or they were otherwise representative of the bear market mindset that is still surprisingly prevalent.

We have already said what there was to say about futures positioning. Today we are going to take a look at different sentiment and positioning indicators. We expected these to look “stretched” as well by now, but they actually don’t. Here is a chart of gold, the discounts to NAV of CEF and GTU, as well as Rydex precious metals fund asset levels and net cash inflows.

 

5-Gold sentimentGold, CEF and GTU discounts to NAV, total Rydex precious metals assets and net cash inflows in the Rydex precious metals fund – click to enlarge.

 

GTU and CEF are closed-end funds investing in bullion (the latter invests in both gold and silver). They tend to trade at discounts to their NAV when sentiment is bearish, and at premiums when it is bullish. GTU’s discount to NAV has been eliminated due to a takeover offer from Sprott, that will mop up its shares and make GTU part of Sprott’s PHYS trust.

However, we may assume that CEF’s stock price relative to NAV still reflects sentiment (at least to some degree – note that CEF may also suffer due to competition from other bullion ETFs). CEF’s NAV discount has narrowed, but there is definitely no enthusiasm in evidence yet.

The same holds for the Rydex precious metals fund (which invests in gold and silver stocks). Inflows into the fund have resumed, but are very small so far. In fact, the fund’s assets and net cash inflows are still a far cry from the amounts that were seen during the 2001-2011 bull market period.

In short, these indicators are all saying that traders remain quite wary of the recent rally in gold and gold stocks. The same remains true of small speculators in COMEX gold futures: the overall net speculative position has mainly increased due to the activities of large traders. Non-reportable traders still only hold a net long position of slightly more than 16K contracts (which is a long way from previous highs above 60K contracts net).

Lastly, the Optix indicator by sentimentrader, which combines the most popular survey data with positioning data, also shows no great enthusiasm for gold yet – it remains well below the “excessive optimism” threshold:

 

6-Gold OptixThe gold optimism index: at a recent 64 points, it has still not reached “excessive optimism” territory – click to enlarge.

 

Conclusion

Based on price action, resp. technical conditions and the state of sentiment and positioning, the recent rally continues to deserve the benefit of the doubt. At some point a sharp pullback will definitely occur though. Historically, we have seen the sector retest its 50- and 200-day moving averages, as well as various lateral support levels with some regularity during bull markets.

One therefore needs to have a plan in place as to how to deal with the inevitable eventual setback. As a final remark to this, note that in the early stages of the rally beginning in late 2000, the sector put in its first noteworthy interim peak when gold finally confirmed its rally.

 

Charts by: StockCharts, Atlanta Federal Reserve, SentimenTrader

 

 
 

 
 

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

   
 

4 Responses to “Gold Stocks Break Out”

  • Rusty Brown:

    re last paragraph: “…Based on price action, resp. technical conditions and…”
    I’m trying to figure out what “resp.” means. Respective? Responsive? Resplendent? Respliced?
    Seems like a particularly unpropitious spot to try to save a few keystrokes.

  • Hans:

    This is indisputably a Central Crank Bank rally.

    Long live Au!

  • Kreditanstalt:

    Given that (especially the major) miners have been reacting, albeit sometimes reluctantly, to the Comex gold price, I will wait for that to make its long-overdue move up before I part with any substantial part of my position.

    Prior to 2013, an event not easily replicated, and under much less favourable credit-land conditions, the “gold price” was far higher…

  • No6:

    I have a plan in place. After the inevitable pull back I am buying physical.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Biggest Stock Market Crashes Tend to Happen in October
      October is the Most Dangerous Month The prospect of steep market declines worries investors – and the month of October has a particularly bad reputation in this respect.   Bad juju month: Statistically, October is actually not the worst month on average – but it is home to several of history's most memorable crashes, including the largest ever one-day decline on Wall Street. A few things worth noting about 1987: 1. the crash did not presage a recession. 2. its...
  • Fed Quack Treatments are Causing the Stagnation
      Bleeding the Patient to Health There’s something alluring about cure-alls and quick fixes. Who doesn’t want a magic panacea to make every illness or discomfort disappear? Such a yearning once compelled the best and the brightest minds to believe the impossible for over two thousand years.   Instantaneous relief! No matter what your affliction is, snake oil cures them all. [PT]   For example, from antiquity until the late-19th century, bloodletting was used to...
  • Canada: Risks of a Parliamentary Democracy
      A Vulnerable System Parliamentary democracy is vulnerable to the extremely dangerous possibility that someone with very little voter support can rise to the top layer of government. All one apparently has to do is to be enough of a populist to get elected by ghetto dwellers.   Economist and philosopher Hans-Hermann Hoppe dissects democracy in his book Democracy, the God that Failed, which shines a light on the system's grave deficiencies with respect to guarding liberty. As...
  • Federal Reserve President Kashkari’s Masterful Distractions
      The True Believer How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.   Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT] Photo credit: Linda Davidson...
  • Thoughtful Disagreement with Ted Butler
      Too Big to Fail?   Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:   “Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”   Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a...
  • Donald Trump: Warmonger-in-Chief
      Cryptic Pronouncements If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!   The commander-in-chief - a potential source of radiation?   This past week, the Donald has continued his bellicose talk with both veiled and explicit threats against purported American adversaries throughout the world.  In...
  • Precious Metals Supply and Demand Report
      Fat-Boy Waves The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.   Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet...
  • The Donald Can’t Stop It
      Divine Powers The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.   The DJIA keeps surging... but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During...
  • 1987, 1997, 2007... Just How Crash-Prone are Years Ending in 7?
      Bad Reputation Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.   Sliding down the steep slope of the cursed year. [PT]   Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place:  the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007,...
  • Stocks Up and Yields Down – Precious Metals Supply & Demand
      Where the Good Things Go Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?   Since putting in a secular low at the turn of the millennium,...
  • The 2017 Incrementum Gold Chart Book
      A Big Reference Chart Collection Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn't get around to reading all of it (and selective reading is always possible, aided by the table of contents at the...
  • Precious Metals Supply and Demand
      Fundamental Developments The prices of the metals shot up last week, by $28 and $0.57.   Heavy metals became pricier last week, but we should point out that the stocks of gold and silver miners barely responded to this rally in the metals, which very often (not always, but a very large percentage of the time) is a sign that the rally is unlikely to continue or hold in the short term. [PT]   Last week, we said:   “One way to think of these moves is...

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