A Growing Bullish Chorus – With Somewhat Muted Enthusiasm

A few days ago a well-known mainstream investment house (which shall remain nameless) informed the world that it now expects the gold price to reach “$1,500 by early 2017”. Our first thought was: “Now they tell us!”. You won’t be surprised to learn that the same house not too long ago had its eyes firmly fixed in the opposite direction.

 

Slider-gold-img-1Da bling be goin’ somewhere, fellow rastas and homies!

Photo via bullionstar.com

 

Why are we telling you this? We have noticed that sudden professions of new-found gold bullishness have begun to proliferate lately, relatively speaking at least. This is not only evident by these Canossa-like conversions of former bearish heretics, but also in the positioning data.

We hasten to add that the bullish arguments are by and large sound – we agree with most of them (for a complete list of same, see this year’s “In Gold We Trust” report). We also want to point out that (as we have mentioned a recent article on the  the CoT report  – see “The Commitments of Traders” for the details) a certain finesse is required to properly interpret allegedly “extreme” positioning data.

Lastly, it should be obvious that in order for a nascent bull market to continue, new converts are actually needed. While it is great fun to see prices rise while everybody is bearish (and vice versa), in a bull market that only gets you so far. At some point there has to be a “moment of recognition”, which prompts new investors to join the fun and make it more fun in the process.

 

1-August GoldAugust gold, daily. As such, the chart continues to look encouraging – click to enlarge.

 

Friends of ours who share our intellectual and investment interest in gold, often send us tidbits of information which we then discuss. In recent weeks a number of analysts have actually upgraded a handful of gold stocks, while a yet others have been fighting the trend and have issued sell ratings – to little avail (repeatedly in some cases!).

We have made a few observations worth sharing in the context of these upgrades,  which often seem to prove the adage that one really doesn’t need analysts in a bull market (in a bear market, they are often considered a nuisance – when people are losing money, they don’t want to know why). Darts seem to work just as well.

Obviously, we are saying this as someone who occasionally also posts such analyses, with decidedly mixed results over time (lately, the results were often quite good, but we ascribe this to luck rather than prescience – and darts would still have done the trick). What strikes us as noteworthy is only this: most of the upgrades seem to be quite timid.

What does it mean when a stock that has just risen 350% from its low is upgraded from “underperform” to “neutral”, with a 12 month price target 25% above its current price level? Making a 25% return in a “no yield” world is usually considered rather mouth-watering. We’re not sure if we would resort to the term “neutral” in this context. On the other hand, we are talking about stocks that can at times move that much in two or three trading days, so it’s all relative.

In that sense one can probably state that enthusiasm for the sector is not exactly at full blast just yet. Another observation, which is more of a general nature is that occasionally the very same things that were pronounced a big drag on the stock prices of gold miners while they were still going down, are now considered potential catalysts for further gains. This just goes to show that it is the market that “writes the news”, so to speak.

 

Positioning Data and Resistance Levels Revisited

We want to briefly revisit positioning data in gold futures and resistance levels in the HUI, two topics we have last discussed in April and May. First of all, net speculative length in gold futures is currently at a record high. Almost needless to say, this makes the market increasingly vulnerable to a correction, but it doesn’t mean  other near term outcomes are impossible.

 

2-CoTs GoldA historically extremely large net speculative long position, but there are two things that continue to put it into perspective: 1. open interest has risen sharply as well, so it hasn’t moved much as a percentage of open interest. 2. Small speculators are still not overly enthusiastic – at least compared to their positioning history over the past 15 years – click to enlarge.

 

Since the small speculator position cannot be seen very clearly on the above chart, we show it here separately:

 

3-CoTs - nonreportablesNon-reportables (i.e., small speculators) have the largest net long position in quite some time, but it remains fairly small in historical terms. The record was more than 60,000 contracts net – click to enlarge.

 

We would conclude from this that the danger of a correction is now quite high again –  something one certainly needs to be aware of. However, one also has to keep in mind that there are a few details that indicate that the market at least has the potential to go even higher first.

Apart from the fact that the positioning extreme has to be put into context, there is also the price pattern itself. For the correction danger to materialize, short term support levels will have to be violated first. This could very easily happen, but it hasn’t happened yet.

Next we want to look at the HUI’s resistance levels again, which we last discussed in April (see: “Weekly Resistance Levels in the HUI”). Below is the chart of lateral support and resistance levels we posted at the time – as you can see, the market has actually run into one of these major resistance areas at the end of last week. It is quite tempting to conclude that a pause is imminent:

 

4-HUI-weekly-resistance-OLDThis the chart from April. Since we got this one right (so far), we’re telling everybody about it…  : ) – click to enlarge.

 

Of course,  although we did guess right in April, for a while we underestimated the rally quite a bit. We originally thought the first bigger correction would set in at around 165 – 170 points at the latest (equivalent to the 2000-2001 initial advance) – but instead the market went higher and corrected by marking time rather than producing a sharp price decline.

So below is an updated version of the above chart, which shows three alternatives as to how things could continue from here. Two of those assume a slightly stronger market in the near term with a little less correction potential than shown above, and one a slightly weaker near term outcome with bigger correction potential.

All of these scenarios assume that a larger degree bull market remains in force – an idea that remains operative as long as no major support levels are violated. Note that the rising 50-day moving average at currently approx. 222 points and the likewise rising 200-day ma at currently approx. 159 points also represent important support levels (near term, resp. long term).

 

5-HUI-weekly-resistance-NEWUpdated weekly resistance chart with alternative paths. Since we got the last one right, none of these will probably work out precisely as advertised, but what actually happens will probably at least have some similarity with one of these – click to enlarge.

 

So one of the possibilities we are entertaining is that the index will still manage to run to the next resistance level in the near term (in July – August, orange and blue lines), which happens to coincide with a gap on the weekly chart which was left open in 2013 on the way down. For karmic balance, there is also a slightly bigger correction penciled in that starts more or less immediately (the black line).

Obviously, some mixture of these potential paths is imaginable as well. Note with respect to the RSI that is is currently diverging bearishly from price, although not by a whole lot. Since it didn’t streak even higher when we made the original version of this chart, it still retains the potential to do so.

 

Conclusion:

The air for gold and gold stocks is clearly getting thinner in the short term, but so far prices have not yet signaled anything untoward. New weekly highs have just been put in last week, which is obviously never a bad thing, as such. This means there may well be even more upside before a correction begins. However, from a risk-reward perspective, it is fair to say that the potential risk now probably exceeds the potential reward in the near to medium term.

Long term, the very same things that make the market look a bit stretched in the near term should actually be considered a bullish datum. Historically such strong rallies have exhibited a strong tendency to turn into long term uptrends.

Stay tuned – in our next update we will take a look at an updated 1970s bull market comparison, which is quite interesting as well.

 

Charts by: BarChart, StockCharts, ShareLynx.

 

 

 

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: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “The Gold Situation”

  • therooster:

    Changing a forward looking forecast comes easily when the very application and the type of demand changes.
    It was not so long ago that the financial application for gold was largely looked upon as being an investment or a store of value (static) for those who were “pro-gold”. That has changed.

    Those bullish on gold now see a new application in the way of its support for debt-free transactions and economic stimulus , which also frees up existing debt (fiat currency)so that it may be purged…… and purged safely.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Capital Structure as a Mirror of the Bubble Era
      Effects of Monetary Pumping on the Real World As long time readers know, we are looking at the economy through the lens of Austrian capital and monetary theory (see here for a backgrounder on capital theory and the production structure). In a nutshell: Monetary pumping falsifies interest rate signals by pushing gross market rates below the rate that reflects society-wide time preferences; this distorts relative prices in the economy and sets a boom into motion – which is characterized by...
  • Full Faith and Credit in Counterfeit Money
      A Useful Public Service There are nooks and corners in every city where talk is cheap and scandal is honorable.  The Alley, in Downtown Los Angeles, is a magical place where shrewd entrepreneurs, shameless salesmen, and downright hucksters coexist in symbiotic disharmony.  Fakes, fugazis, and knock-offs galore, pack the roll-up storefronts with sparkle and shimmer.   The Alley in LA – in places such as this, consumers are as a rule well served by applying a little bit of...
  • How to Get Ahead in Today’s Economy
      “Literally On Fire” This week brought forward more evidence that we are living in a fabricated world. The popular story-line presents a world of pure awesomeness. The common experience, however,  falls grossly short.   There are many degrees of awesomeness, up to total awesomeness – which is where we are these days, in the age of total awesomeness, just a short skip away from the Nirvana era. What is Nirvana, you may wonder? We only know for sure that Nirvana is what...
  • US Money Supply Growth Jumps in March , Bank Credit Growth Stalls
      A Movie We Have Seen Before – Repatriation Effect? There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.   The y/y growth rate of TMS-2...
  • Gold and Gold Stocks – Conundrum Alert
      Moribund Meandering Earlier this week, the USD gold price was pushed rather unceremoniously off its perch above the $1300 level, where it had been comfortably ensconced all year after its usual seasonal rally around the turn of the year. For a while it seemed as though the $1,300 level may actually hold, but persistent US dollar strength nixed that idea. Previously many observers (too many?) expected gold to finally break out from its lengthy consolidation pattern, but evidently the...
  • Fear and Longing - Precious Metals Supply and Demand
      Waiting for Permanent Backwardation  The price of gold dropped 9 bucks, while that of silver rose 3 cents. Readers often ask us if permanent backwardation (when gold withdraws its bid on the dollar) is still coming. We say it is certain (unless we can avert it by offering interest on gold at large scale). They ask is it imminent, and we think this is with a mixture of fear and longing for a higher gold price.   Lettuce hope this treasure is not cursed... but it probably is....
  • Scorn and Reverence - Precious Metals Supply and Demand
      Shill Alarm One well-known commentator this week opined about the US health care industry:   “...the system is designed the churn and burn... to push people through the clinics as quickly as possible. The standard of care now is to prescribe some medication (usually antibiotics) and send people on their way without taking the time to conduct a comprehensive examination.”   From the annals of modern health care... [PT]   Nope. That is not the standard...
  • Global Turn-of-the-Month Effect – An Update
      In Other Global Markets the “Turn-of-the-Month” Effect Generates Even Bigger Returns than in the US The “turn-of-the-month” effect is one of the most fascinating stock market phenomena. It describes the fact that price gains primarily tend to occur around the turn of the month. By contrast, the rest of the time around the middle of the month is typically far less profitable for investors.   Good vs. bad seasonal timing...   [PT]   The effect has been studied...
  • Tales from “The Master of Disaster”
      Tightening Credit Markets Daylight extends a little further into the evening with each passing day.  Moods ease.  Contentment rises.  These are some of the many delights the northern hemisphere has to offer this time of year. As summer approaches, and dispositions loosen, something less amiable is happening.  Credit markets are tightening.  The yield on the 10-Year Treasury note has exceeded 3.12 percent.   A change in pace: yields are actually going somewhere. There is...
  • Is Political Decentralization the Only Hope for Western Civilization?
      Voting with their Feet A couple of recent articles have once more made the case, at least implicitly, for political decentralization as the only viable path which will begin to solve the seemingly insurmountable political, economic, and social crises which the Western world now faces.   Fracture lines – tax and regulatory competition allows people to “vote with their feet” - and they certainly do. [PT]   In the last few months, over 3,000 millionaires have...
  • Why the Fundamental Gold Price Rose - Precious Metals Supply and Demand
      Gold Lending and Arbitrage There was no rise in the purchasing power of gold this week. The price of gold fell $22, and that of silver $0.19. One question that comes up is why is the fundamental price so far above the market price? Starting in January, the fundamental price began to move up sharply, and the move sustained through the end of April.   1-month LIBOR (London Interbank Offered Rate – the rate at which banks lend euro-dollars to each other). LIBOR and GOFO...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Dog Blow

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]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist