Consolidating Below Resistance

The USD denominated gold price continues to trade in a tight range just below the major $1,270 to $1,280 resistance zone. One market observer recently commented that 'the more often gold bumps against  this resistance level without breaking though, the more likely a sell-off becomes'. We actually tend to think that the opposite is the case: the more often the resistance level is attacked, the more likely a breakout becomes.

With gold oscillating in a tight range between about $1,240 and $1,270 and the HUI in a correspondingly tight range of roughly 10 points (approx. 212-222) over the past three weeks, it is fair to say that the sector has become the proverbial 'dull market' that has been doing its best to put everyone to sleep. Such 'dull market' situations more often than not tend to lead to a rally, although the slightly smaller probability of a negative outcome can obviously not be dismissed out of hand. Given the tight range, it won't take much of a move in either direction to provoke technically inspired follow through buying or selling. The daily chart of spot gold below shows the resistance zone as well as the likely target that would be reached in the event of a breakout (conversely, a breakdown would initially target the July – December lows near $1,180).

 


 

gold daily annGold with resistance levels and the likely target in the event of a breakout. A few noteworthy details: RSI has remained above 50 over the past 5 weeks, which is a positive sign. Recently the 20 day ma (red) has crossed above the 50 dma (blue), and the 20 dma has begun to serve as support (note that it provided resistance during the preceding decline). MACD remains on a buy signal – click to enlarge.

 


 

The target is derived from the slanted inverse head and shoulders formation visible on the chart (i.e., the distance between the 'head' and the neckline) as well as the next lateral resistance level. Happily these tend to roughly coincide, which lends additional credibility to the target.

Zooming in on the action in the active April gold futures contract over the past week, it can be seen that the market has subtly strengthened, insofar as dips have found buyers at successively higher levels:

 


 

gold-1-weekGold over the past week, April futures contract, 30 minute candles. While the resistance zone has rejected several attempts to break through, there has been a succession of higher lows – click to enlarge.

 


 

Admittedly, given the fact that gold sometimes suffers quite large single day declines for no apparent reason, all of the above evidence remains tentative for now. Only a successful breakout can lay the remaining doubts to rest.

 

Gold Stocks and Sentiment

As noted above, gold stocks have also been in a very tight range over the past few weeks. Last week saw the usual apprehension and slight weakness going into the payrolls report, followed by a relief bounce thereafter.

Note in this context that this behavior makes even less sense than usual at the moment, as the Fed's 'QE tapering' is unlikely to be derailed unless exceptionally weak data are reported. Friday's payrolls report was weak on the surface, but the household survey was considerably stronger than the headline establishment survey, so it cannot really be called a weak report. The fact that the headline number missed the expectations of economists by a mile was once again blamed on the weather, but it has in the meantime turned out that this is actually nonsense.

The triangular consolidation on the daily chart of the HUI continues to look encouraging to us.

 


 

HUI-annotHUI, daily – the consolidation continues. If a breakout occurs, the 250 – 260 level will be a likely target – click to enlarge.

 


 

The HUI-gold ratio has mimicked this consolidation and in the process recently retested support. One thing that stands out when examining the various charts is that they all sport roughly analogous divergences (such as the HUI's price/MACD divergence indicated above).

These are all divergences relative to prices, whether in gold stocks or the metal itself. E.g. the GDM bullish percent index has put in a medium term divergence with prices, and the same is true of positioning and sentiment data. Further below we show both the commitments of traders in gold futures and the 'public opinion' index (an average of the most important sentiment surveys) with the most important divergences highlighted. Similar to various technical momentum measures these have diverged from prices both at the highs in 2011 and the recent lows in 2013. These divergences are a major factor supporting the idea that a turnaround is underway.

 


 

HUI-gold ratio, STHUI-gold ratio: consolidating above support (blue dotted line). The red dotted lines represent resistance levels which are likely to come into play if breakout from the recent consolidation occurs – click to enlarge.

 


 

BPGDMThe GDM bullish percent index vs. the HUI (the BP index shows the percentage of component stocks sporting point & figure buy signals – i.e., it is not a sentiment measure, something we have seen mentioned elsewhere). We have shown this chart before, but this is a cleaner version of it, with all clutter removed. Important lows in the HUI are aligned with lows in the bullish percent index – click to enlarge.

 


 

Gold-CoT-stCommitments of traders in gold futures with examples for divergences between net speculator positioning and prices. A negative divergence was put in place at the highs, while recently a positive divergence has emerged (big speculator positions are the most relevant data series in this case) – click to enlarge.

 


 

Gold-public opinionPublic opinion on gold: divergences between price and net bullishness according to an amalgam of sentiment surveys – click to enlarge.

 


 

Currencies

Oddly enough, the US dollar also doesn't look too bad technically – the dollar index remains above its 50 dma, and has recently moved sideways in a tight range as well. Since late November it has built a small ascending triangle. However, one must put the action into context: it is quite noteworthy that the dollar has lately not been able to benefit much from EM currency turmoil and recent weakness in risk assets. Possible reasons for this are a sharp decrease in future rate hike expectations that has become reflected the federal funds futures market and the fact that dollar money supply growth has been the strongest among the major currencies for quite some time. At some point relative money supply inflation rates tend to exert an influence on exchange rates and the difference are beginning to add up. Currently the dollar index is close to a  support trend line  that forms the lower boundary of an ascending triangle:

 


 

DXY-daily

DXY has also been trapped in a tight range lately. Blue dotted lines = lateral support, red lines = resistance – click to enlarge.

 


 

We are using the South African Rand as a proxy for the EM currencies that have recently made headlines due to their weakness. The reasons for employing the Rand as a proxy are that the Rand is fairly liquid and therefore often used to hedge EM currency exposure, and the fact that the South African Reserve Bank is as a rule not actively intervening in foreign exchange markets, but allows the exchange rate to go wherever it wants to go. This has been the policy for many years and may well be why reason number one (good liquidity) applies. As can be seen below, the Rand ended last week near the apex of the triangle that has recently formed:

 


 

ZAR,daily

The SA rand, daily: still in a triangle – click to enlarge.

 


 

Triangles tend to be continuation formations, so from a technical perspective one should expect more EM currency weakness to eventually emerge. Note though that the Rand as well as a basket of EM bonds denominated in local currencies (which trades as an ETF under the symbol LEMB) have hit medium to long term support levels recently, so one has to keep an open mind as to which way the cookie will ultimately crumble. 

 

Addendum: Long Term Charts

Below we show two long term charts that may not necessarily be meaningful (definitely not for the short term), but nevertheless strike us as interesting. The first one is a chart showing the growth in M2 since 1999 with the gold price overlaid. M2 is inferior as a money supply measure to broad money TMS-2, mainly (but not only) due to the fact that retail money market funds are included in M2, which amounts to double counting (money invested in money market funds is lent to corporations and the government, and therefore is already in someone's demand deposit accounts). Still, the two measures most of the time trend together, although the growth rate of the true money supply TMS-2 has been noticeably greater, especially after 2000 and 2008. Anyway, the gold price has tracked the growth in the money supply quite faithfully since 1999, but this has changed since 2011. Arguably, it will at some point catch up again. Obviously there is no fixed correlation between money supply growth rates and the gold price, but the idea is that eventually, the negative effects from the recent bout of additional monetary pumping will become evident, which in turn should serve to lend support to gold.

 


 

M2 and Gold

M2 and the price of gold since 1999 – click to enlarge.

 


 

The second chart shows an Elliott wave count of the HUI-gold ratio since the 2000 low. In a sense this is an even more dubious chart (our interpretation may be incorrect. The move labeled as wave 2 has by now taken far longer to form than primary wave 1, but in terms of wave shapes wave 1 does look like a clear impulse, so we wouldn't know how else to count it).

Whether this is the right idea is something we may only know for sure in a few years time, but it would be great for investors in the sector if that turned out to be the case. One event that would immediately invalidate it would be a decline of the ratio below its year 2000 low.

 


 

HUI-gold, LT wave countHUI-gold ratio – possible long term wave count from the low established in 2000 – click to enlarge.

 


 

 

 

Charts by: BarCharts, Sentimentrader, StockCharts, Investing.com


 

 

 

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5 Responses to “An Update on Gold, Gold Stocks and Currencies”

  • Vess:

    I am not convinced that using Elliott Waves on ratio charts is a valid approach. Think about it – the Elliott principle is valid for a stock or an index, because 5 steps up, 3 steps down is the simplest and most efficient way of achieving long-time progress with short-term corrections, which is what the economy generally does. (3 steps up, 1 step down does not allow for a correction on the way down; 7 steps up, 5 steps down is too complicated; 3 steps up, 3 steps down does not allow for progress; 3 steps up, 2 steps down does not allow for a clear low from which the next leg up can start.)

    But a ratio chart (like stocks/gold) acts more like an oscillator, with the stocks getting ahead of the fundamental (gold) or falling behind it – neither condition can continue indefinitely, even with short-term corrections.

    • You do have a point about that – I admit I have some reservations about this myself. The main reason why I did it anyway was because I know the guys over at EWI are labeling all sorts of data using e-wave rules. Anyway, it should definitely be taken with a grain of salt.

  • No6:

    Why is silver not confirming the action in gold?

    • ManAboutDallas:

      That’s the one remaining “fly” in this ointment. One possible reason might be that silver is still being held hostage by the “silver as industrial metal” camp and needs to be liberated with a frontal assault by the “silver as money” commandos. I think the key will be gold breaking through the overhead at $1300. When that happens, silver better get in gear, and pronto, or this whole rally may just turn into yet another heart-breaker.

    • I agree with our Man from Dallas: silver is held back by its ‘industrial metal’ aspect. Recall that silver also didn’t confirm the rally in gold for quite some time back in 2000-2001, for very similar reasons. In fact, this non-confirmation doesn’t worry me at this stage. The non-confirmation at the 2011 highs was far more concerning. At present I actually believe that silver hanging back a bit is a good rather than a bad thing, because it means that the market is assessing the fundamental situation in a manner that is highly conducive to a beginning rally in the gold complex overall.

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