Operational Disappointments

The arrival of the Qu.2 earnings season was not kind to the gold sector (earnings season almost never is as it were). Goldcorp (GG) and Aurico (AUQ) had to release negative operational guidance, both GG and Barrick Gold (ABX) missed their earnings estimates, Novagold (NG) was hit by news that its joint venture partner ABX was postponing a development decision on its main asset Donlin Creek indefinitely, and so forth.


We have noticed that even the relatively provincial financial press in small European countries has picked up on the bad performance of gold stocks lately, which is the functional equivalent of the story making the front page of 'Reader's Digest'.

The rally in the HUI index that started in May was thus cut short and the sector declined again for what looks like a retest of the low. Interestingly, the past two days have seen it shrugging off further bad news – instead it reacted to a firming gold price.








The HUI declines to re-test its May low. An MACD buy signal seems imminent – click chart for better resolution.

Technical Conditions

On a longer term chart, we can see that the May low in the HUI was actually a retest of the 2006 high (!), a level that was achieved when gold first crossed above the $700 level (gold is now trading 125% higher).

It would be fair to say that gold stocks have provided investors with negative leverage to gold, in spades.

The May low in the HUI index was in fact a retest of the 2006 high – click chart for better resolution.



Consequently the XAU and HUI ratios to gold have plunged. In case of the XAU-gold ratio, it is now well below the level recorded at the end of gold's 20 year long bear market in the year 2000. This provides us with a bit of perspective as to how incredibly cheap gold stocks have become.



The HUI-gold ratio and the gold price in dollar terms (green line) – click chart for better resolution.


The XAU-gold ratio and the gold price (green line). The ratio is now below 10 – at the bear market low in the year 2000 it stood at about 16. In other words, people are today more bearish on gold stocks than they were at the end of a grueling, 20 year long bear market – click chart for better resolution.


Many reasons have been forwarded as to why gold stocks have declined so much. They range from political risks ('resource nationalism') to rising costs, to declining ore grades, to a dearth of discoveries to rising development costs to the precious metals ETF's attracting investor funds that used to be invested in gold stocks.

All of these arguments are quite reasonable, but as we have pointed out before, the very same things could have been said while the gold stocks were still rallying.

In other words, not one of these rationalizations makes any sense in terms of explaining the price action of recent months. The profit margins of gold mining companies on average are – even with all those negatives baked in – at an all time record high.

This leaves us with the only explanation that actually does make sense: people are simply bearish on gold itself and believe that its bull market is over. However, this belief is almost impossible to reconcile with the price chart of gold itself, which looks bullish in terms of every fiat currency it is measured in. In fact, the recent consolidation since the 2011 spike high looks very similar to the consolidations experienced in the past. Moreover, a rally that really smacks of 'bubble conditions' has yet to occur. In the 1970's, gold rose by 100% in one year (1974) and then it even rose by 200% in another year (1979). Nothing even remotely resembling these 'bubblicious' advances has happened in the current bull market. Not yet, that is.



Gold in dollar terms, weekly – click chart for better resolution.



Gold in euro terms, weekly. If people were to focus on this chart, sentiment would probably not be as bearish as it is right now – click chart for better resolution.


Gold in euro terms, daily. It actually looks as though it is about to break out to new highs soon – click chart for better resolution.



Gold in Rand terms, weekly. This too looks as though the action since September 2011 was simply a bullish consolidation – click chart for better resolution.

Gold Sentiment

This brings us to the question whether it is possible to ascertain the state of sentiment aside from the obvious price action. Luckily it is in fact possible to do so. Below are three charts that illustrate where things currently stand.



Mark Hulbert's HGNSI (Gold Sentiment Newsletter Sentiment Index). This has lately fallen to minus 14.8%, which means that on average, gold timers are currently recommending allocating 14.8% of one's portfolio to a short position in gold. As you can see from this chart, when they all agree, they usually tend to be wrong – click chart for better resolution.



Gold, public opinion, via sentimentrader. This chart amalgamates the readings of several sentiment surveys. Bullish sentiment continues to wallow near the levels seen at the 2008 low – click chart for better resolution.



Public opinion on silver – this chart is similar to the preceding one, in that it amalgamates a number of sentiment surveys. In silver, bearish sentiment has been at an extreme level for several months as well – click chart for better resolution.




In spite of the disappointing price action in gold stocks (which have only turned up again over the past two trading days) it is probably not a good time to 'throw the towel'. Admittedly, until gold in dollar terms breaks above the resistance in the $1630-$1640 region, the consolidation phase may still continue for longer. Also, an eventual breakdown below lateral support can still not be ruled out (support currently resides in the $1525-$1535 region). We have recently shown the chart below that depicts the 1970's gold bull market, with all the consolidation triangles that occurred during that advance:



The 1970's gold bull market: triangles marked in red led to an upside breakout, those marked in green to a downside breakout – click chart for better resolution.



This shows that triangular consolidations do not always lead to a continuation of the previous uptrend. In fact, downside breakouts must be taken very seriously. However, it also shows that these consolidations lead to a resumption of the primary trend far more often than not.

Given the bullish fundamental backdrop for gold – real interest rates remain negative and central banks seem eager to resume monetary pumping as economic confidence once again wanes – the probability is high that the current consolidation phase will once again lead to an upside breakout. If this is indeed the case, then gold stocks are a screaming buy at current levels, in spite of all the well documented problems.

The caveat is that the May low in the HUI index is really an important line in the sand. Should gold unexpectedly break below the lateral support level discussed above, then gold stocks would likely also break below this old support/resistance line. If this were to happen, it would have to be regarded as a very bearish development. The good thing is that buyers therefore have a clear stop loss level that is not too far away from current prices, which means that risk can currently be greatly minimized – something that is rarely the case in this volatile sector.

Addendum: Chinese Rebar Prices

Yesterday we came across the below chart depicting rebar prices in China ('rebars' are the twisted steel coils used to reinforce concrete). This seems to confirm that China's property sector is really in trouble now – and with it, the steel sector and very likely the entire economy. The recent somewhat better HSBC flash PMI is certainly not enough to sound the 'all clear' for China's economy.



Rebar prices in China fall to a new low for the move. This is probably a good indicator of the true state of China's economy, which is highly dependent not only on exports, but also on construction activity – click chart for better resolution.




Charts by: bigcharts, stockcharts.com, sentimentrader, Bloomberg, St. Louis Fed. 



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


6 Responses to “Gold and Gold Stocks, A Technical Update”

  • JasonEmery:

    Here are the hui components and their trailing PE’s, according to yahoo finance: aem-na, au-899, abx-7, cde-6.5, bvn-11, ego-19, gfi-10, gg-19, hmy-15, hl-11.5, iag-5.5, kgc-na, nem-66, gold-20, auy-20.

    You can see that three are making little or no money, four have PE’s right near 20, and the majority have very low PE ratios.

    The low PE stocks, if bought in sufficient variety to reduce single stock risk, offer a very good opportunity for gain. If gold goes higher, which I believe it will within a couple of months, then you get a very good chance for multiple expansion, not to mention higher earnings, assuming gold goes up faster than the price to mine it.

    That last point is what is killing gold stocks. Gold is going up at right about the same pace as everything else. If gold was going up faster, gold miners would be making money hand over fist. However, gold seems like it is due for a quick spurt higher.

    • worldend666:

      Caveat Jason on buying the low p/e stocks. Make sure they are not hedging the gold price as a rise in the price of gold would have no effect on profits of those companies.

      • JasonEmery:

        Worldend666-Are you sure you aren’t thinking of the XAU gold stock index? I thought that companies couldn’t be listed in the hui if they had more than one year of production sold forward.

        HUI AMEX gold BUGS (basket of unhedged gold stocks)………

        • worldend666:

          You got me there. I wasn’t aware that they would chop and change the index depending on whther a company was hedged or not. Seems hard to imagine in practice.

  • roger:

    Pater, any insights on the gold stocks once discussed here, particularly the junior miners?

    Some of them have fallen over 80%. JAG dropped over 90%. Admittedly, it has management issues and at this point it looks like as long as the company does not collapse & going to 0, it is likely a buy. But that’s quite a big “if” as well. THM & KGN also experienced serious declines. It appears THM also has some mgmt issues.

    It’s a bit curious to see that these companies experience management problems at nearly the same timeline. Does it look like these things are mostly temporal factors that will go away (i.e. related to gold price & gold to local currency ratios) or is it something more serious? I would be inclined to opine on the former, due to the widespread phenomenon across many gold stocks. Some opinions & insights?

  • jimmyjames:

    In spite of the disappointing price action in gold stocks (which have only turned up again over the past two trading days) it is probably not a good time to ‘throw the towel’

    Thnx for the update-

    Gold stocks always do what they’re supposed to do-in relation to the price of gold-
    They just never do it when we think they should-

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Pushing Past the Breaking Point
      Schemes and Shams Man’s willful determination to resist the natural order are in vain.  Still, he pushes onward, always grasping for the big breakthrough. The allure of something for nothing is too enticing to pass up.   From the “displays of disbelief, revealing touching old-fashioned notions” file... [PT]   Systems of elaborate folly have been erected with the most impossible of promises.  That prosperity can be attained without labor.  That benefits...
  • The Myth of Capitalism - A Book by Jonathan Tepper
      Crony Capitalism vs. Free Markets Many of our readers are probably aware of the excellent work our friend Jonathan Tepper does for Variant Perception (VP)*****, a financial research boutique that really does bring a unique perspective to the table*. Jonathan (with co-author Denise Hearn) has just added a new book to his résumé, which is going to be released on 12 November: The Myth of Capitalism (MoC) – Monopolies and the Death of Competition** (a link to the official site is at the...
  • Three Cheers for James Riley!
      Going All In All people, of both good and questionable character, share a singular talent.  They excel at taking something that’s tolerable in moderation, and then pushing it to the outer limits of absurdity.  Why live with restraint when you can get radical?   A fairly famous stretch of LA riverbed graffiti... [PT] Photo credit: saber   Public and private debt levels, NASDAQ stock valuations, the federal register, face tattoos, canned energy drinks.  You name...
  • Crumbling Piles of Sand
      Just a Little Avalanche or an Implosion? A few years ago, we briefly discussed the dynamics of sand piles in these pages, which are a special field of study in mathematics and physics (mathematically inclined readers can take a look at two papers on the subject here:”Driving Sandpiles to Criticality and Beyond “ (PDF) and  'Games on Line Graphs and Sand Piles “(PDF) – unfortunately two other studies that used to be available have in the meantime disappeared from the...
  • When Fake Money Becomes Scarce
      Remaining Focused A rousing display of diversions this week assured the American populace was looking every which way but right under its collective nose.  Midterm elections.  White House spats with purveyors of fake news.  The forced resignation of Attorney General Sessions...   Old drug warrior (otherwise recused) on his way home to Alabama...   Sideshows like these, and many more, offered near limitless opportunities to focus on matters of insignificance.  Why...
  • Fun and Profit - Precious Metals Supply and Demand
      While Not Saving The Planet, Let Us At Least Have A Good Time The price of gold went up seven bucks, and that of silver rose eight pennies. For many people, the attraction to gold and silver began with a desire to protect themselves from the monetary train wreck of 2008. That often grew into a sense that gold is the solution to that problem.   The post 2008 GFC monetary train wreck: US true broad money supply is expanded by more than 153% in a mere decade, as the Fed takes...
  • Wizard’s First Rule – Precious Metals Supply and Demand
      The Last to Go Terry Goodkind wrote an epic fantasy series. The first book in the series is entitled Wizard’s First Rule. We recommend the book highly, if you’re into that sort of thing.   An image from the title page of Terry Goodkind's best-selling fantasy epic “Wizard's First Rule”. We'd be at bit wary of standing around on that stone-slab bridge to be honest. [PT]   However, for purposes of this essay, the important part is the rule...
  • US Stock Market - Re-Coupling with a Panic Cycle?
      The Mighty Gartman Investment newsletter writer Dennis Gartman (a.k.a. “the Commodities King”) has been a target of ridicule at Zerohedge for a long time. His pompous style of writing and his uncanny ability to frequently make perfectly mistimed short term market calls have made him an easy target.* It would be quite ironic if a so far quite good recommendation he made last week were to turn into the call of a lifetime (see ZH: “Gartman: 'We Are Officially Recommending Shorting...
  • Roger Barris for Congress!
      Economic Man Threatens to Leave You Alone if Elected This one is mainly for readers residing in that glorious water source for California commonly known as Colorado. In case you are not aware of it yet, Roger “Economic Man” Barris, an occasional contributor to this site, is running for Congress in Colorado on a Libertarian Party ticket. We will briefly explain why you should vote for Roger, but first two pictures:   Roger Barris, Libertarian Party candidate for the House...
  • Revisiting the Halloween Effect
      From Crash Danger to End-of-the-Year Ramp   [Ed note by PT: we are unfortunately a week late in posting this issue of SI, which didn't reach us in time due to a technical problem. We decided to post it belatedly anyway: for one thing, the effect under discussion is normally in effect until the end of the year; for another, the statistical validity of this information goes beyond the current year, as it is a recurring phenomenon. Lastly we would note that we have a strong...
  • It's Not That Day Just Yet - Precious Metals Supply and Demand
      Degrees of Urgency Monday was Veterans Day, a bank holiday in the US. The prices of gold and silver dropped $23 and $0.61 respectively. “But isn’t gold supposed to go up when...?”   Warren Buffet and Aragorn discuss what to do with the gold. Aragorn wants it, because he knows that even if it's not today, “that day” will come. [PT]   Why? Because everyone else will bid it up. Why? Because they expect someone else to bid it up. Why? Warren Buffet is...

Support Acting Man

Item Guides

Austrian Theory and Investment


The Review Insider


Dog Blow


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!