Technical Divergence Successfully Maintained

In an update on gold and gold stocks in mid June, we pointed out that a number of interesting divergences had emerged which traditionally represent a heads-up indicating a trend change is close (see: Divergences Emerge for the details). We did so after a big down day in the gold price, which actually helped set up the bullish divergence; this may have felt counter-intuitive, but these set-ups always do. Consider now the updated chart below (we have added the HUI-gold ratio in the third panel of the chart, as it provides additional clarity).

 

Everybody has different reasons for wanting to buy or hold gold – this is actually a fairly good one… :)

 

Gold, the HUI index and the HUI-gold ratio – it was a “close shave”, but the HUI did not violate its previous low and the divergence with gold was therefore maintained. This is even more obvious  in terms of the HUI-gold ratio, which would have made a higher low even if the index had not.

 

As the chart illustrates, after our update gold and gold stocks continued to head  down for almost two weeks, but readers watching the sector no doubt noticed that: 1. gold stocks declined only reluctantly and the sector exhibited internal strength (i.e., even on down days, numerous stocks managed to gain ground) and 2. the divergences we discussed remained in place.

Since then, there was a minor bounce in the gold price from a lateral support level created by the December 2017 low, but the relative strength in gold stocks has continued to increase, which is a clear change in character. The HUI-gold ratio even managed a kind of “breakout” by moving above a lateral support-resistance line formed by a previous low and two previous highs (to the extent that one can even speak of “support and resistance” with respect to ratio charts, which is debatable).

Note that the HUI-gold ratio was in a fairly strong downtrend for more than six months before bottoming – very quietly – in mid March. Obviously, not every upturn in the ratio will lead to a significant trend change. The ratio often expands in the short term in the course of gold price rallies such as in the rather disappointing seasonal rally that began in mid-December. In that case it was actually the weakness of the expansion in the ratio that proved to be a heads-up.

The recent case is different, as the ratio has begun to strengthen noticeably in a time of weakness in gold and silver prices. Having said that, the HUI index itself is now facing overhead resistance both from previous price highs and in the form of its still declining 200-day moving average.

While prices have moved above the 50-day and 20-day ma, the latter has not even crossed back above the former yet, and both have only just begun to flatten out. If one squints a bit, one can see minor divergences between the index level and the RSI and MACD oscillators. All in all, the recent advance still looks a bit dubious from a technical perspective.

It would therefore not be a big surprise if the recent rally were to stall out near current levels and was followed by another consolidation phase before a breakout attempt. A successful breakout above lateral resistance and the 200-day ma is ultimately required to confirm the positive message from the divergences at the recent lows.

Per experience, the more forceful such a confirmation is, the more reliable it will be – this refers specifically to the moment of confirmation, regardless of its precise timing. Considering the lengthy bottoming period from mid-2015 to early 2016 (and other historical examples) one has to be mentally prepared for the possibility that it could take a few more weeks or even a few more months before a new medium term uptrend emerges, but it could just as well happen right away.

For long-term oriented investors this should be irrelevant (unless one has the patience of a Zen master, one should not be dabbling in this sector anyway), but short term traders have to be vigilant, as a potentially worthwhile opportunity continues to be in its formative stages.

 

HUI daily, with moving averages and near term lateral resistance penciled in. Mildly positive divergences with oscillators are in evidence, but major resistance still has to be overcome. Note: when it finally happens, it will happen fast. At that point it is usually best to abandon any remaining reservations.

 

A Positioning Extreme

Apart from the improving HUI-gold ratio, there is another signal that indicates that traders should be on alert. Since 2007 the CFTC is publishing disaggregated commitments of traders data in addition to its legacy CoT reports. We are keeping an eye on the “managed money” category in this report, which primarily consists of speculative trend followers (mainly CTAs and hedge funds).

This group has held a net short position in COMEX gold futures on just three occasions in the entire history of the report. Two of those were recorded in 2015 – one in the middle of the year and one right at the December low, after which a scorching rally ensued (in about 6 months gold rallied by around $330 from its low, the XAU gained 200% and the HUI 180%).

Due to last week’s holiday the most recent update is already a bit dated (June 26), but it was just the third time the “managed money” group went net short in the aggregate – if only by a handful of contracts (on the chart below the net position is stated as “0”, but in fact it was net short by 24 contracts). After the report was published gold continued to decline at first. It seems likely that the net position of this group of traders subsequently went a bit further into net short territory.

 

The “managed money” category in COMEX gold futures. Top panel: net position (black line) vs. the gold price; bottom panel: net position (black line) as well as gross short and gross long position (red and green areas). The red lines in the top panel illustrate that another significant divergence has emerged, in this case between net speculative positioning and price.

 

We want to stress here that we are definitely not arguing that it is always positive when speculators go net short in this market. Very long-term data clearly suggest otherwise – i.e., context is important. In this case, context is provided by the recent improvement in the gold sector’s relative strength against the metals and a likewise fairly recent minor shift in macroeconomic fundamentals, which look now slightly more favorable for gold than previously.

As the chart illustrates, the net speculative position is also increasingly diverging from prices this year, after having tracked them fairly closely from Q3 2015 until Q4 2017. Clearly this market is now potentially quite susceptible to a change in perceptions.

In the next missive we will discuss the change in macroeconomic fundamentals alluded to above and also take a brief look at gold vs. real interest rates and inflation.

 

Charts by: StockCharts, goldchartrus.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

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Gold Sector Remains at an Interesting Juncture
      Technical Divergence Successfully Maintained In an update on gold and gold stocks in mid June, we pointed out that a number of interesting divergences had emerged which traditionally represent a heads-up indicating a trend change is close (see: Divergences Emerge for the details). We did so after a big down day in the gold price, which actually helped set up the bullish divergence; this may have felt counter-intuitive, but these set-ups always do. Consider now the updated chart below...
  • Confronting the Dragon with Peter Navarro
      Of No Real Use A young man might go to business school believing he is obtaining some sort of academic training that will enable him to make a comfortable living.  His degree may gain him entry into a large corporation, where he can work his way up to a good income.  This may even put him on the fast track to what he envisions as success.   Don't knock it: Being useless can lead to unexpected career opportunities... [PT]   But his academic training likely won't...
  • Trouble in Paradise
      Impressive Zeal for Faded Ideals Uncompromising independence, rugged individualism, and limitless personal freedom were once essential to the American character.  According to popular American folklore, they still are.  We have some reservations.   Rugged individualists suffer mid-life identity crisis. [PT]   The principles that gave rise to the American character died long ago.  Freedom.  Liberty.  Independence.  Limited representative government. Sound...
  • Gold – Macroeconomic Fundamentals Improve
      A Beginning Shift in Gold Fundamentals A previously outright bearish fundamental backdrop for gold has recently become slightly more favorable. Ironically, the arrival of this somewhat more favorable situation was greeted by a pullback in physical demand and a decline in the gold price, after both had defied bearish fundamentals for many months by remaining stubbornly firm.   The eternal popularity contest...   The list of gold fundamentals that have improved is...
  • The United States of Terror
      Bombs Away! Two recent articles* have again demonstrated that the greatest “terrorist” entity on earth are not the bogymen – Russia, China, Iran, North Korea – so often portrayed by Western presstitutes and the American government, but the United States itself!   This is an old cartoon, but still a good one. It perfectly describes the trigger-happy Western political class and the depth of its “thinking”. By happenstance we recently reviewed the Libya intervention...
  • Capitulation and Currency Pain - Precious Metals Supply and Demand
      Waving the White Flag The price of gold rose two bucks last week, though the price of silver fell 10 cents. We have seen several analyses recently predicting big price drops, in one case by at least $500 in gold by the end of the year. Is this what capitulation looks like? It’s said they don’t ring a bell at the top, but they don’t ring a bell at the bottom either.   The give-up moment arrives... [PT]   We have also seen technical analysis arguing that...
  • Maurice Jackson Interviews Rick Rule – Investing in Natural Resources
      Contrarian Investment Opportunities in Natural Resources Maurice Jackson of Proven and Probable has recently interviewed Sprott U.S. Holdings CEO Rick Rule, a well known specialist and “old hand” in the natural resource space. This is quite a wide-ranging and interesting interview, so we decided to present it to our readers. Below you find a summary and our comments on the main topics discussed, a video/podcast of the interview,  as well as a download link to a PDF file of the...
  • The True Sport of MAGA
      Chest Bumps One of the more extraordinary things that investors have seen in living memory is unfolding at this precise moment. This goes for business leaders, money managers, veteran Wall Streeters, value investors, 401(k) holders, momentum traders, FX guys, gold bugs, technical gurus, chartists, pork belly speculators, quants, astrologists, Larry Summers, put option sellers, dweebs and geeks, millennial index fund enthusiasts, and everyone in between.   Pork belly speculators...
  • Black Holes for Capital - Precious Metals Supply and Demand
      Race to the Bottom Last week the price of gold fell $17, and that of silver $0.30. Why? We can tell you about the fundamentals. We can show charts of the basis. But we can’t get into the heads of the sellers.   Other people's fiat: in the global race to the bottom, it was recently the turn of emerging market currencies to tank. [PT]   We can say that in the mainstream view, the dollar is rising. The dollar, in their view, is not measured in gold but in rupees in...
  • US Money Supply and Fed Credit – the Liquidity Drain Becomes Serious
      US Money Supply Growth Stalls Our good friend Michael Pollaro, who keeps a close eye on global “Austrian” money supply measures and their components, has recently provided us with a very interesting update concerning two particular drivers of money supply growth. But first, here is a chart of our latest update of the y/y growth rate of the US broad true money supply aggregate TMS-2 until the end of June 2018 with a 12-month moving average.   US TMS-2: y/y growth rate with...

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