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 intense patience training session for gold bugs is set to continue for a while longer.

 

Luckless gold bug surrounded by false starts, with his only friend, a startled moose.

 

The above mentioned seasonal rally started from the second higher mid-December low since the beginning of the current Fed rate hike cycle. So far, gold seems to be doing the same thing at every December rate hike anniversary  – it declines into a mid December low, and then rallies sharply as soon as the Fed  announcement hits the wires (the sequence of lows since the first rate hike was: 2015: $1,045; 2016: $1,124; 2017: $1,238).

The fact that the gold price was almost $200 higher at the start of the seasonal rally than two years earlier was certainly encouraging – but although this year’s rally in gold was just as lively as the 2016-2017 turn-of-the-year advance, silver and precious metals stocks failed to properly mirror it (and obviously, it was a far cry from the early 2016 rocket ride).

This was a bit surprising: as we noted shortly after the December rate hike in Patterns, Cycles and Insider Activity (see part 1 and part 2 for the details), both gold stocks and silver had a lot going for them early this year. The former had seen an unprecedented surge in insider buying, while futures speculators abandoned the latter with, well, abandon.

Given their exceedingly poor record when reaching positioning extremes, it was fair to expect that the strongest seasonal month of the year for silver (namely January) may turn out to be particularly strong this year. It obviously wasn’t – although silver moved higher by slightly more than $2, this move fell well short of the $3 rally (from almost the same starting point) in the same time period a year earlier.

For quite some time, the HUI and XAU indexes have mimicked the silver price rather than the gold price; their performance in the strong seasonal period was therefore disappointing as well. Since then, it has become even more so. The chart below shows the gold price and the HUI Index over the past year – we have penciled in several bearish and bullish divergences.

 

First the HUI put in a rather glaring negative divergence against gold between February and early September 2017 – the two seasonal high points of that year. This was followed by a positive divergence relative to the early July low and the mid-December rate hike low (note here that it doesn’t matter whether the HUI makes a higher or lower low relative to gold – it is only important that two lows diverge against each other). After the weak seasonal rally from mid-December 2017 to late January 2018 (it didn’t even make it into early February, which it normally “should have” done) the HUI lost even more relative strength. In fact, its relative strength vs. gold has been nothing short of dismal. The only good thing we can glean from this chart at the moment is that the most recent downswing in gold has actually generated a positive divergence with the HUI. For now, anyway –  we cannot be certain yet that it will hold.

 

In late October of last year the HUI-gold ratio broke through a support level that held from late 2016 until then – and has yet to regain it. It may not feel like it, but the ratio has actually begun to improve since making a low in mid March. It is now back at the low it reached in late 2000, after a 20 year bear market (seriously).

 

The sharp increase in the HUI-gold ratio in early 2016 was supported by strength in silver, and a decidedly more bullish macro-economic fundamental backdrop for gold than the one in place currently. The main point is though that expansions in the ratio are bullish, while contractions are bearish. The conclusion in context with the current situation is: the fact that the “support shelf” of the 2016-2017 period has given way is negative, but a minor positive signal has developed  fairly recently, as the ratio has begun to recover – something that hasn’t been much remarked upon as far as we know.  Admittedly, it is not much of a recovery yet and it may well turn out to be a temporary fluke, but one always has to consider such things in context. Gold’s slide below the “psychological” 1300 level has received a lot of attention, but this contradictory move hasn’t. Information that is not getting much attention often turns out to be important (what everybody knows already is usually not worth knowing and vice versa).

 

One tidbit worth mentioning is that there continues to be a rather wide dispersion of performance within the gold sector. Some stocks behave in line with how one would expect them to behave in light of a fairly strong gold price, while others underperform quite excessively. Company-specific developments are driving these performance differences in most cases, but they often seem way too large relative to the underlying fundamental data or relative to guidance.

It seems possible that the quarterly re-weighting of indexes and ETF components is exacerbating the situation due to the huge increase in passive investment strategies (re-weightings may have a more noticeable effect on stocks in this relatively small and illiquid sector than on stocks with a big market capitalization and a lot of trading volume). Regardless of the reason, it is clear that the performance dispersion within the sector since the mid 2016 interim peak has expanded quite a bit.

 

Macro-Fundamentals Conundrum

Slightly over a year ago, we discussed the macro-economic drivers of the gold price, noting that most of them were either neutral or bearish at the time (this was in early April 2017 – see: An Overview of Macroeconomic Price Drivers). This has not changed – on the contrary, most of these indicators look even more bearish today. Take for example real interest rates – or rather, our best market-based proxy for real interest rates, the TIPS yield:

 

Inverted 5-year TIPS yield vs. the gold price (note: the scale for TIPS yields on the left hand side must be multiplied with [-1] to make sense; currently the yield is at a positive 78 basis points). For a very long time these two data series were extremely well aligned – but they have begun to drift apart quite noticeably since early 2017.

 

Other macro-economic drivers of the gold price such as credit spreads, the steepness of the yield curve, risk asset price trends, the BKX-SPX ratio (as a proxy for faith in the solvency of the banking system) or money supply growth are all gold-bearish at the moment. The trend in commodity prices – surprisingly – remains somewhat constructive, but not wildly so (and it stands on shaky ground in view of the strengthening US dollar).

Moreover, to the extent that firm commodity prices can be said to be indicative of strong economic confidence, one could even call their strength somewhat detrimental at the moment. Certainly all indicators of economic confidence exhibit a lot of strength: faith in monetary authorities has been fully restored, as has the belief that excessive government debt poses no threat whatsoever (apart from “special cases” on the outermost periphery, such as Venezuela).

At this point, the only trend we can discern that is unequivocally gold-bullish (for now) is the re-acceleration in the US federal deficit. Apart from this, only the downtrend in the US dollar appeared to be supportive for a while, but even that has now changed. In fact, the recent bout of gold weakness was no doubt largely triggered by US dollar strength. Here is a brief look at the technical picture:

 

Dollar Index, DXY: On the weekly chart on the left, it seems that there is more room to run, at least until resistance near the 95 level comes into play. On the daily chart DXY seems short term overbought and a small momentum divergence has emerged. In terms of futures positioning, the previously extremely large speculative net long positions in the euro and speculative net short positions in DXY have declined a bit in recent weeks, but not by as much as such a move would normally suggest. Positioning data in precious metals futures look actually significantly more constructive by comparison.

 

It is obvious from a fundamental perspective that the US dollar enjoys a large and growing advantage in terms of its interest rate differential vs. euro and yen. Money supply growth is decelerating in all major currency areas, but the deceleration is most pronounced in the US (the Fed has a head start in this respect as well). On the other hand, price inflation in CPI terms is strongest in the US as well, which detracts from the interest rate advantage.

Moreover, since euro and yen both are likely used as funding currencies for carry trades, any wobbles in risk assets are bound to lead to unexpected bouts of strength in them. Japan and the euro area are net external creditors and financial market and/or economic problems are occasionally prone to provoke repatriation flows – which are sometimes quite persistent (recall that the yen has often defied conventional wisdom regarding the effect of rate differentials in the past).

A potentially interesting development is the recent weakness in various emerging market currencies. The plunge in the Argentinian peso and the Turkish lira has “infected” other EM currencies. These currencies have begun to weaken across the board,  though not all to the same extent.

What makes this interesting is that it is very often a late stage phenomenon (i.e., it tends to happen at the tail end of dollar rallies), which tends to culminate in blow-off moves and the emergence of crisis conditions in various countries. Very often gold will weaken as these moves play out and reverse course sharply thereafter. Obviously, there is no guarantee that things will play out in the same manner every time, it is just something that has frequently happened in the past.

 

Argentine peso and Turkish lira – while these are essentially perennial collapse currencies, the recent acceleration in their demise is noteworthy.

 

One could probably state in summary, that there is very little to lend support to gold at the moment – and yet, as Keith Weiner points out regularly of late, all indications are that gold hoarders are actually quite busy hoarding. His calculated theoretical “fundamental price” (which is based on comparing futures with spot prices, and determining the profit from entering carry trades or doing the opposite) has moved well above the market price this year.

Recently the gap between the two prices has in fact widened to a rarely seen extent (a quick glance at a longer term chart suggests that a roughly similar difference was only seen in late 2007 and on two occasions in 2008 – early 2016 came close):

 

Fundamental vs. market price – a wide gap has opened up this year.

 

What to make of this seeming contradiction between the signals from macro-economic drivers and the actions of market participants? Note here that the “theoretical” fundamental price is derived from the activity of market participants just as the market price obviously is. The only answer that makes sense to us is that market participants (particularly those buying and selling physical gold) “see” something that is not evident in the data yet.

This has been going on for quite some time, and perhaps they will change their mind again, but why should they? After all, one can make an educated guess as to what makes people want to hold gold, and if anything, the possible reasons have become more rather than less relevant. Lastly, on occasions when the  fundamental/market price spread has widened as much as it recently has, the theoretical price has tended to lead the market price.

 

Next: A Closer Look at Positioning

Things become even more interesting when looking at recent positioning data in precious metals – we will inter alia look at those in the next post, which should be published shortly. We will also discuss the odd HUI-silver correlation mentioned above in more detail. Stay tuned.

 

Charts by: StockCharts, St. Louis Fed, Monetary Metals, investing.com

 

 

 

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

   
 

2 Responses to “Gold and Gold Stocks – Conundrum Alert”

  • utopiacowboy:

    Yes you’re right. I am regarding the difficulties with precious metals and mining stocks as an exercise in patience. It may take five or ten years but this house of cards can’t continue.

  • Bam_Man:

    Having often heard the Central Bankers’ latest asset inflation scheme referred to as “The Everything Bubble”, I would suggest that calling it “The Everything But Gold and Silver Bubble” would be far more accurate.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • America Goes Full Imbecile
      Credit has a wicked way of magnifying a person’s defects.  Even the most cautious man, with unlimited credit, can make mistakes that in retrospect seem absurd.  But an average man, with unlimited credit, is preeminently disposed to going full imbecile.   Let us not forget about this important skill...  [PT]   Several weeks ago we came across a woeful tale of Mike Meru.  Somehow, this special fellow, while of apparent sound mine and worthy intent, racked up...
  • Retail Capitulation – Precious Metals Supply and Demand
      Small Crowds, Shrinking Premiums The prices of gold and silver rose five bucks and 37 cents respectively last week. Is this the blast off to da moon for the silver rocket of halcyon days, in other words 2010-2011?   Various gold bars. Coin and bar premiums have been shrinking steadily (as have coin sales of the US Mint by the way), a sign that retail investors have lost interest in gold. There are even more signs of this actually, and this loss of interest stands in stark...
  • Credit Spreads: Polly is Twitching Again - in Europe
      Junk Bond Spread Breakout The famous dead parrot is coming back to life... in an unexpected place. With its QE operations, which included inter alia corporate bonds, the ECB has managed to suppress credit spreads in Europe to truly ludicrous levels. From there, the effect propagated through arbitrage to other developed markets. And yes, this does “support the economy” - mainly by triggering an avalanche of capital malinvestment and creating the associated boom conditions, while...
  • Gold Divergences Emerge
      Bad Hair Day Produces Positive Divergences On Friday the ongoing trade dispute between the US and China was apparently escalated by a notch to the next level, at least verbally. The Trump administration announced a list of tariffs that are supposed to come into force in three week's time and China clicked back by announcing retaliatory action. In effect, the US government said: take that China, we will now really hurt our own consumers!  - and China's mandarins replied: just you wait, we...
  • Industrial Commodities vs. Gold - Precious Metals Supply and Demand
      Oil is Different Last week, we showed a graph of rising open interest in crude oil futures. From this, we inferred — incorrectly as it turns out — that the basis must be rising. Why else, we asked, would market makers carry more and more oil?   Crude oil acts differently from gold – and so do all other industrial commodities. What makes them different is that the supply of industrial commodities held in storage as a rule suffices to satisfy industrial demand only for a...
  • Chasing the Wind
      Futility with Purpose Plebeians generally ignore the tact of their economic central planners.  They care more that their meatloaf is hot and their suds are cold, than about any plans being hatched in the capital city.  Nonetheless, the central planners know an angry mob, with torches and pitchforks, are only a few empty bellies away.  Hence, they must always stay on point.   Watch for those pitchfork bearers – they can get real nasty and then heads often roll quite literally....
  • Lift-Off Not (Yet) - Precious Metals Supply and Demand
      Wrong-Way Event Last week we said something that turned out to be prescient:   This is not an environment for a Lift Off Event.   An unfortunate technical mishap interrupted the latest moon-flight of the gold rocket. Fear not true believers, a few positive tracks were left behind. [PT]   The price of gold didn’t move much Mon-Thu last week, though the price of silver did seem to be blasting off. Then on Friday, it reversed hard. We will provide a forensic...
  • Merger Mania and the Kings of Debt
      Another Early Warning Siren Goes Off Our friend Jonathan Tepper of research house Variant Perception (check out their blog to see some of their excellent work) recently pointed out to us that the volume of mergers and acquisitions has increased rather noticeably lately. Some color on this was provided in an article published by Reuters in late May, “Global M&A hits record $2 trillion in the year to date”, which inter alia contained the following chart illustrating the...
  • Cryptocurrency Technicals – Navigating the Bear Market
      A Purely Technical Market Long time readers may recall that we regard Bitcoin and other liquid big cap cryptocurrencies as secondary media of exchange from a monetary theory perspective for the time being. The wave of speculative demand that has propelled them to astonishing heights was triggered by market participants realizing that they have the potential to become money. The process of achieving more widespread adoption of these currencies as a means of payment and establishing...
  • The Fed's “Inflation Target” is Impoverishing American Workers
      Redefined Terms and Absurd Targets At one time, the Federal Reserve's sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.   Fed Chair Jerome Powell apparently does not see the pernicious effects...
  • A Walk on the Wild Side
      A Walk on the Wild Side   “Never play cards with a man called Doc.  Never eat at a place called Mom’s.  Never sleep with a woman whose troubles are worse than your own.” – Nelson Algren, A Walk on the Wild Side   Fresh Fruit or Rotting Vegetables? A subtle gas seems to always be vented into the atmosphere at the sunset of an extended bull market.  As the light fades, an odor that’s indiscernible from that of fresh fruit or rotting vegetables wafts down...

Support Acting Man

Item Guides

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