HUI Divergence from Gold Grows

In recent trading days, gold broke above resistance at $1,400 to test the upper rail of the resistance zone at approximately $1,425. We thought that such a move might be possible this week (see Monday's update), but we didn't know it would be egged on by news about Syria and the worsening situation in India and other other emerging markets. If people bought gold on account of the Syria news, they definitely made a mistake. Such rallies on geopolitical news are always given back. After all, gold is a monetary metal. Why should its price depend on whether a few missiles are lobbed at far-away Assad's regime? There are reasons to buy gold, but this isn't one of them (and neither is declining mine production, something we have once again seen promoted this week. Declines or increases in mine production are largely irrelevant to the gold price). 

Apparently traders in gold stocks were a bit more alive to these facts than gold futures traders, as gold stocks sold off sharply even while gold rose. Thus the negative divergence between gold and gold stocks we bemoaned on Monday kept growing this week.


Stop-Gap Measures by India's Government

It also seems likely to us that some traders are worrying that India's government might do something stupid about its gold reserves or the gold held by its citizens. This worry is definitely justified, as India's government has so far done nothing but institute stop-gap measures to halt the slide of the rupee and the deterioration of the country's current account. Not a single step has been taken that would actually be required: bold reform is needed, but it is politically unpopular. And so the government takes one useless emergency measure after another – and it is definitely eying gold as the next vehicle to do something stupid with.

Anyway, whenever gold stocks fall while gold rises concurrently, it means that the market does not expect the rally in gold to stick. Per experience, it is right in well over 90% of the cases.


Gold Stocks, Technical Picture

Let us quickly go over the technical picture, beginning with gold stocks. The HUI successfully tested its rising 20 day moving average yesterday, and the 50 dma has flattened out and begun to rise a little bit. These are slight positives at this point. However, an MACD sell signal has been given as well (a tentative one, so it may not mean much yet) and the short term Elliott wave picture suggests that the correction is probably not finished yet (take that with a big grain of salt: our wave interpretation may be erroneous and we mention one of the alternate possibilities below the chart).



HUI-daily annotA daily chart of the HUI – the rising 20 dma has held, RSI remains above the 50 level. Perhaps it will be possibly to avoid a move to the lower Bollinger band for a second time. Ideally, the 50 dma should survive a test – click to enlarge.



HUI intraday 15 min, 10 days-annA 15 minute chart of the action in the HUI over the past ten trading days. The recent decline has actually clarified the picture, assuming a correction is underway. As you can see, it appears that wave 5 of C of the correction is still missing in order to complete the correction pattern. That would also allow the index to test its 50 day moving average. However, an alternative wave count is thinkable as well – namely that wave C was already completed at the point which we have labeled wave 3 above, and that the wave labeled 4 in the chart is actually wave 1 of the next rally sequence – click to enlarge.



Naturally, the HUI-gold ratio has continued to decline this week. What bulls would like to see is obviously that it finally manages to put in a higher low. Higher highs have been seen a few times in previous rally attempts, but higher lows of significance have been rarer than hen's teeth so far. Unfortunately an MACD sell signal is in force at the moment.



HUI-gold ratioThe HUI-gold ratio – will it finally make a significantly higher low? – click to enlarge.



Gold's Technical Picture

At the time of writing, gold is down by another $10 and has broken back below the $1,400 level, as was to be expected (of course that might still change by the time COMEX opens for trading). Apparently one of the triggers was the decision by the UK parliament not to agree to a participation of UK military forces in a Syrian intervention. In fact, the evidence that Assad ordered the  poison gas attack is quite thin and that he would give such an order is extremely illogical to boot.  If one asks 'cui bono?', one must conclude that the person that is benefiting the least from such a poison gas attack is none other than Assad. On the other hand, the Al Qaeda offshoots fighting his regime would benefit greatly. No wonder then that the UK House of Commons is skeptical about an intervention. Since the Cameron government immediately said it would respect the decision, the new 'decider' in the US will be all alone. That lowers the chance of an attack, although he might still send a few drones in. And so all those who have erroneously bought gold because they thought it should be bought because of the Syria situation are selling it again and taking losses, as was bound to happen. At the time of writing, the December contract has arrived at a first level of short term horizontal support, but more important support is found at lower levels.



Gold-30 minuteA 30 minute chart of the December gold futures contract with short term lateral support and resistance levels – click to enlarge.



The daily chart shows that gold was rejected at a fairly important resistance level and that a test of support seems now likely. It is conceivable that the support line at $1,350 will be tested again in the short term, but obviously this doesn't have to happen (note though that gold stocks trade at the level they last inhabited when gold was quoted at about $1,330).



Gold, daily, dec contr.-annA daily chart of the December gold futures contract with horizontal support and resistance levels. $1,350 remains the most important short term support level – click to enlarge.




It was always clear to us that even in the event the late June low in gold were to turn out to be 'the' low, the ride would be very bumpy, especially in the gold stocks. Recall our ruminations about the 2008 low and how much short term volatility accompanied the process. However, we are still in the seasonally strong period for gold, and US economic data have lately come in on the weak side, which alters the 'taper' related psychological backdrop a bit (not that we think that it is really important, as the 'QE' related damage has already been done. But many market participants trade on this 'taper' nonsense). Should the

upcoming August payrolls report also come in a bit weaker than expected, the gold rally would very likely get another short term boost.

In the very short term we have to wait for the 'war premium' to be wrung out of gold and will have to see how well the gold stocks take the associated gold price correction.  For the bullish case it is important that the 50 day moving average in the HUI holds, that the HUI-gold ratio produces a higher low, and that ideally, the current correction stops before the index moves all the way back to the lower Bollinger band. In other words, a few indications of technical strength need to be seen.




Charts by: StockCharts, BarCharts


2 Responses to “Gold and Gold Stocks – A Short Term Technical Overview”

  • Mark Humphrey:

    Thanks for this valuable service, which I visit almost every day. All of your commentary is interesting; your economic commentary is really outstanding–packed with valuable explanation.

    I don’t worry that much about technical analysis, although I habitually look for clues and hints in chart patterns. It’s all a matter of probability, as you have pointed out; and in these times, chart pattern probability is low. Maybe that’s an offshoot of misinformed speculation and asset price inflation, caused by rampant monetary inflation.

    The one idea that has occurred to me about gold is: when the dollar starts to fall in earnest against other currencies, then gold will vault higher. In my understanding, purchasing power parity theory would require that, for the buck to sink, export prices in the US would have to rise faster than import prices from abroad. Then demand for US products from abroad would fall and demand for foreign products by Americans would rise.

    For US prices to rise faster than prices in other countries, we need more of what makes the mare run: money printing. We’re headed in that direction, probably, because our economy is growing weaker month by month. So since markets are forward looking, weakening economic statistics portend faster money growth, which might inspire currency speculators to sell the dollar.

    Then gold will probably get a big push higher.

    Question: why no link to George Reisman’s website Thanks for featuring Tibor Machan.

  • jimmyjames:

    On the other hand, the Al Qaeda offshoots fighting his regime would benefit greatly. No wonder then that the UK House of Commons is skeptical about an intervention. Since the Cameron government immediately said it would respect the decision, the new ‘decider’ in the US will be all alone.

    Prime Minister Stephen Harper says his government supports allies “who are contemplating forceful action” to deal with the crisis in Syria, but Canada has no plans “of our own” for a military mission there.

    Read more:


    Off topic- but-
    haha.. now that the lie is being exposed… “the coalition of the willing” are sneaking away- one by one-

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