Sentiment Extremes

Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold’s fundamental drivers aren’t yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times.

 

Blackbeard’s treasure chest.

 

If one looks at long term charts of gold, one can see that meaningful rallies usually start as technical short covering moves, which often are still at odds with at least some of the macroeconomic fundamentals. The starting points of these rallies often involve divergences with associated markets or data points. If the market is too far ahead of itself, these moves will be given back again quickly.

If a meaningful move has indeed begun though, the fundamental drivers will begin to fall into place as it continues, and it will become clear in hindsight that the market has anticipated these developments. It is therefore definitely worthwhile to pay attention to sentiment extremes and inter-market divergences.

One thing that has struck us as noteworthy lately is that the momentum of the decline in gold stocks has decreased significantly during the the most recent phase of the decline in the gold price – contrary to the much stronger relative momentum seen in the August sell-off.

 

During the move in gold prices from $1220 to the current level of approx. $1135, the HUI Index has only lost less than 8 points (as we write this, the loss has actually been reduced to just 5 points). That is remarkably mild compared to preceding selling squalls (the first of which is highlighted above) – click to enlarge.

 

Despite the increasing reluctance of gold stocks to weaken further in the face of gold’s ongoing swoon, sentiment on gold has become quite bearish. The next chart is actually a bit dated by now. It shows the short term sentiment situation as of December 1, with gold trading at around $1180. At the time the HUI was actually unchanged from its level of two weeks earlier (when gold still traded at $1220).

The chart was originally shown in the monthly issue of the Elliott Wave Financial Forecast and depicts a 10-day average of the DSI (daily sentiment index of futures traders) compared to gold prices. We have removed the wave labeling from the chart. The historically very low 10-day average of 9.1% bulls included a single day reading of 6%, which was just 1% above the previous all time low. A new all time low of just 4% bulls in the daily DSI was posted in mid December.

 

The 10-day moving average of the DSI stood at 9.1% bulls as of December 1, which was among the three lowest 10 day averages since the 2011 peak. At the 2015 price low, this indicator was actually slightly higher – click to enlarge.

 

Here is a chart of one day DSI readings that shows the 4% all time low in the bullish consensus posted in mid December. In addition it shows a recent divergence between the gold price and the Goldman Sachs financial conditions index, which indicates that gold has moved down too far too fast, probably due to sheer momentum:

 

Gold vs. the GS financial conditions index and daily DSI readings (daily sentiment of futures traders, bullish consensus percentage) – click to enlarge.

 

These sentiment readings are not only at odds with the relative performance of gold stocks in the preceding weeks, they are also diverging from the higher late 2015 DSI readings which coincided with a lower gold price.

In recent years, gold has exhibited strength early in the year and has been weak in the normally seasonally strong period at year end. The usually strong showing early in the year may be a hint that the seasonal pattern in silver remains operative. It also shows that the short term effect of seasonal jewelry demand on gold prices has been very small in recent years; this effect is far more obvious when it is aligned with a bullish macro-trend driving gold.

Given the pattern seen in recent years, the fact that such strong bearish sentiment is seen right at the end of the year is definitely a heads-up indicating that another bout of surprise strength in gold is likely in early 2017. This is supported by anecdotal evidence as well.

As Mish notes here, both Barron’s and the Financial Times have recently seen fit to pronounce gold “dead”. It has “died” many times in the mainstream financial press in recent years and such stories tend to proliferate near turning points. There is certainly no shortage of bearish articles on gold lately – even many long term bulls are currently bearish on the short term outlook (the opposite situation can be found in the stock market, see further below).

 

US Dollar Divergence

This brings us to another well-known anecdotal contrary indicator, namely the Economist magazine. The uptrend in the US dollar is one of the negative macro fundamentals currently putting pressure on gold, but the dollar index is also one of the price series from which gold is diverging at the moment.

Whether the US dollar is rising or falling, the Economist is always worrying about it. Up or down, it’s always bad (Google Economist covers on the dollar and try not to laugh out loud!). Economist cover stories on the dollar not only have that in common though, they also represent warnings of an imminent change in trend, usually of at least the medium term variety. As forecasts go, the magazine’s pronouncements on the dollar are unblemished by success. Here is the cover that appeared in the first week of December (note, the rising dollar is a “problem”…:))

 

The Economist has spotted another dollar problem.

 

Here is the chart showing the divergence between the dollar index and gold:

 

The dollar index vs. gold, weekly, since 2012. The two periods highlighted show that gold tends to anticipate moves in the dollar. In late 2012 – mid 2013 gold sold off sharply, even though the dollar index didn’t move much – but it rallied sharply 6 months later. Recently the dollar index has broken out to new high ground, but gold has not “confirmed” this move so far.

 

Anecdotal sentiment as well as dollar positioning data (in currency futures) are buttressing the idea that the divergence shown above is actually meaningful. Admittedly, it would not take much to negate it, but that seems unlikely to happen in the near term.

 

Gold Stocks – Long Term Support and Resistance Levels

Below is a chart we have shown before, which shows important trading ranges and the associated lateral support and resistance lines in the HUI Index over the long term. We have made the annotations on this version of the chart about two or three months ago, when it was still uncertain how deep the ongoing correction would become (it has become deeper than we thought it would, but one of the levels shown on the chart seems to have come into play):

 

A monthly chart of the HUI. When we annotated this chart, we pointed to the blue dotted line which served as resistance in 2002-2003 and support in 2008 and briefly in early 2015 again. We didn’t really think it would get there, but the line was almost touched again recently – click to enlarge.

 

Perhaps it will be sufficient that the line has been almost reached. In early January 2016 an important support line at 100 was slightly undercut intraday before the index reversed (a more pronounced break was evident in the equivalent XAU support line), and sometimes a market finds support slightly above an obvious support line. We wouldn’t necessarily be surprised if this support is revisited before the market reverses and stages a significant rebound, but it certainly doesn’t have to happen.

 

Fundamental Drivers

Apart from the uptrend in the dollar, other currently gold-bearish macro drivers consist of the ongoing decline in credit spreads, the strength in stock prices, as well as the surge in real yields (in the form of TIPS yields).  On the positive side, we find strength in commodity prices and a noticeable steepening of the yield curve.

Real yields are currently probably the most important of these drivers, as a very pronounced and very tight negative correlation between TIPS yields and gold has been in evidence for quite some time. A renewed decline in real yields will probably be needed for a sustainable reversal in the gold price. The uptrend in 5-year TIPS yields has actually stalled a bit lately – from a high of 32 basis points in mid December they have decreased to 20 basis points as of last week.

 

5 year TIPS yields – the uptrend since mid 2016 has been quite negative for gold, but perhaps this trend is about to reverse again – click to enlarge.

 

The steepening yield curve indicates that inflation expectations are rising, which is confirmed by a recent 27-month high in the 5-year inflation breakeven rate. This usually tends to be bullish for gold, but is currently outweighed by other considerations.

 

10 year minus 2 year treasury note yield. The yield curve has steepened quite a bit in recent months – click to enlarge.

 

As for competing asset classes such as stocks, we have recently discussed the NAAIM exposure index in these pages (see “The Exiling of Risk” for details). The average net stock market exposure of fund managers taking part in the survey remains above 101%, but what is really remarkable is that the most “bearish” manager was net long by 30% last week. As far as we know, this is yet another unprecedented datum:

 

NAAIM survey data details: responses may range from -200% leveraged short to +200% leveraged long. The average exposure currently stands at a historically very high 101.33%, but the most astonishing data point is the +30% net long position of the “most bearish” respondent highlighted above – click to enlarge.

 

Since the correlation between stocks and gold has been strongly negative of late, the proliferation of sentiment and positioning extremes in stocks is also supporting the notion of a turnaround in the gold price in the not-too-distant future.

 

Conclusion:

It looks like gold is close to staging a playable rally again early in the new year. Whether it will be durable or just a technical rebound is hard to say at the moment – that will have to be determined as it unfolds. If a rally does get underway in early 2017, one thing is definitely going to be different from previous years though: it will be the first time in the past four years that gold and gold stocks deliver a new year rally from a higher low (the 2014, 2015 and 2016 rallies all started from progressively lower lows).

That would represent further subtle confirmation that the market’s character has changed. Consider in this context that the first correction in a new bull market can retrace a significant percentage of the initial rally – in the worst case, up to 100%. Such significant early corrections usually have in common that they generate greater bearishness than was evident shortly before the initial rally phase, which seems to be the case with gold at this juncture.

 

Charts and tables by: StockCharts, Elliott Wave International, CSinvesting, St. Louis Federal Reserve Research, NAAIM

 

 
 

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

   
 

One Response to “Gold – Ready to Spring Another Surprise”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold Sector Update – What Stance is Appropriate?
      The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
  • Don’t Blame Trump When the World Ends
    Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook.   One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
  • Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
      Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
  • What is the Best Time to Buy Stocks?
      Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity?   Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
  • Trump and the Draining of the Swamp
      Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
  • Gold and Silver Divergence – Precious Metals Supply and Demand
      Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
  • When Trumponomics Meets Abenomics
      Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]   Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
  • The Great Wailing
      Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations.   Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any...   You’d think Washington had been invaded by Goths, now...
  • Receive a One Percent Gift When Buying or Selling a Home
      How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine.  Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell.   The people who took this photograph probably want to...
  • Silver Futures Market Assistance – Precious Metals Supply and Demand
      Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday.   Taking off for real or not? Photo credit: NASA   Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...
  • Unleashing Wall Street
      To Unleash or Not to Unleash, That is the Question... LOVINGSTON, VIRGINIA –  Corporate earnings have been going down for nearly three years. They are now about 10% below the level set in the late summer of 2014. Why should stocks be so expensive?   Example of something that one should better not unleash. The probability that a win-lose proposition will develop upon meeting it seems high. It wins, because it gets to eat... Image credit: Urs Hagen   Oh,...
  • Boondoggles for the Swamp Critters
      Monster or Mozart? BALTIMORE – Investors seem to be holding their breath, like a man hiding a cigarette from his wife. It’s just a feeling, and it’s not the first time we’ve had it... but it feels as though it wouldn’t take much to send them all running.   Actually, they're not going anywhere yet... but there is a lot of overconfidence by those who were very worried when prices were a lot better - click to enlarge.   Meanwhile... we’re coming to a deep...

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