A Test of Patience …

Actually, we are obviously not qualified to answer the question posed in the title of this post. We published an article entitled “Gold & Gold Stocks – Potentially Bullish Developments”, early last week which turned out to be particularly ill-timed. Both the metals and the mining stocks got whacked almost as soon as the proverbial ink on it was dry.

We hope that the overarching topic of the article, which was inspired by divergences and sector-internal relative performance data still made it worth reading. We are specifically referring to the ideas regarding how cyclical gold bear markets end, how early stage bull markets develop, and why there is a certain sequence of events that can usually be observed when that happens.

As to a sell-off starting right after we mentioned bullish developments, this mainly demonstrates that anything is possible in the short term. Luckily we did not neglect to mention potential negatives – after all, the future is always uncertain.

The gold market was ambushed last week by a very strong ISM report (which was so strong it strikes us as a contrary indicator), and the ECB’s assault on the euro, which helped an already very stretched dollar index to become even more stretched (the RSI on the daily chart briefly touched the 85 level last week). This has certainly introduced fresh uncertainties, as the dollar index is actually close to breaking through a long term resistance level.

 

1-DXY monthlyThe dollar index monthly. Close to besting resistance, and there is actually an MACD buy signal on the monthly chart now. Note also the MACD/Price divergence that was set up between 2005-2008. Interestingly, gold is tantalizingly close to giving a monthly MACD buy signal as well – click to enlarge.

 

Obviously the markets are currently discounting the idea that both the BoJ and the ECB will move ahead of the Fed in the confetti debasement race. It is however important to keep in mind that currency debasement remains the name of the game, and which central bank is more proficient at it at any given point in time does not alter the basic fact that they are all doing it. It is noteworthy in this context that gold in terms of the euro, the yen and cable does not display a short term support breakdown similar to that evident in dollar terms.

 

2-Gold in euro,yen,poundGold in euro, yen and pound sterling terms – short term support has held so far – click to enlarge.

 

A strong and rising dollar is certainly a negative for gold, but the dollar is only one of several factors driving the gold price. For instance, gold nearly doubled from its 2008 high to its 2011 high, even though the dollar rebounded from its 2008 low concurrently. The short term outlook has nevertheless become more uncertain, and with it also the medium term outlook, for the simple reason that there remain only two notable short/medium term lateral support levels for gold in dollar terms. This is a parallel to the similarly uncertain situation experienced in May. Gold and silver in dollar terms are depicted below. As can be seen, they have formed another downwardly sloped wedge, and are once again poised just above support:

 

3-Gold-Silver wedgesGold and silver wedges. Both metals are close to support areas – click to enlarge.

 

As soon as the most recent support break in gold happened, the financial press was brimming with bearish pronouncements again, with Goldman Sachs reiterating its $1,050 target for the umpteenth time since June 2013. Naturally, we cannot rule this possibility out. The level is a potential price attractor, as this was roughly where the 2008 peak was put in.

On the other hand, this target can only come into play if the risk asset bubble continues unabated, and no doubts creep in with respect to central bank policies. Consider in this context that the gold market as a rule tends to reflect such doubts long before any other markets are doing so. E.g. the 1999-2000 double bottom (the low was actually made in 1999) occurred in parallel with the late 90’s stock market bubble going parabolic and Mr. Greenspan being addressed as the “Maestro”. So the Goldman Sachs price target is strongly dependent on faith in central banks continuing to hold up for a considerable time period from here on out. This seems somewhat unlikely on the grounds that enormous economic distortions have been put into place by their policies, but it is presumably not impossible.

 

Gold Stocks – Down, But Not Out Just Yet

In spite of the fact that mining costs at most producers have been declining for several quarters, they remain quite close to current gold prices in many cases. These still relatively thin margins have both advantages and disadvantages for investors. The advantage is huge earnings leverage in the event of a gold price rally. To illustrate this with a simple example: imagine a company mining gold at $1,200/oz. all in. At a price of $1,300, its margin will be $100 per ounce. If the gold price rallies from $1,300 to $1,400 – an increase of 7.7% – the earnings margin of our hypothetical miner will double.

The disadvantage is obviously that it won’t take much of a price decline to move this hypothetical operation toward producing losses. It is therefore not too surprising that gold stocks are currently especially volatile in both directions. The sector has also broken a short term support level in the course of last week’s sell-off, but it has continued to maintain a divergence with the gold price relative to the last sell-off in May.

This is to say: so far. There is no guarantee that this will continue to be the case, but it was interesting that Tuesday’s small bounce in the gold price back to the unchanged level from an earlier sell-off immediately brought some buying interest back to the sector. Since this may merely have been tactical short covering, one probably shouldn’t read too much into it. Whether it is meaningful will depend on follow-through, which may or may not happen.

Below are two charts illustrating the situation. Gold in dollar terms compared to the HUI, which shows that in spite of their short term underperformance last week, gold stocks still diverge positively in the medium term. Obviously though, they now have to overcome additional resistance, similar to gold itself. The second chart shows GDXJ, the HUI and the HUI-gold ratio. GDXJ is interesting because it has tended to be a relative strength leader during rallies this year and the 200 dma seems to have stopped its decline for now.

 

4-Gold vs. HUIGold daily vs. the HUI. Both have violated lateral supports, but the HUI continues to diverge positively relative to its lows in late May – click to enlarge.

 

5-GDXJGDXJ, HUI and the HUI-gold ratio. The red dotted lines indicate the short term support that has failed with the decline from the blue rectangles. In HUI-gold a short term uptrend has failed as well. The one-day bounce may not mean anything, but was achieved in spite of gold merely returning to the unchanged level on the day – click to enlarge.

 

Conclusion:

Obviously, the fact that gold has lost the near term support around 1280 is bad news for gold bulls. However, this market hasn’t only fooled the bulls during its consolidation since 2013. Since it has essentially no trend, it has done the same to the bears, who have yet to see their projections fulfilled more than a year after the June 2013 low. In the short term, the bears appear to have the upper hand, but this can easily change again.

Still, the action has made the medium term outlook more uncertain. Note in this context that prices have moved in a very large triangle since mid 2013, and from a technical perspective it cannot be ruled out that this is the prelude to another leg down in prices. Note though that one major factor remains gold-supportive, namely credit spreads. The TLT-HYG ratio (a proxy for credit spreads) remains in an uptrend in spite of a recent recovery in HYG and a back-up in treasury yields (HYG has recently begun to decline again from a lower high). The ratio has trended higher all year, which represents a strong warning sign for risk assets as well.

 

6-TLT-HYGThe TLT-HYG ratio, a proxy for credit spreads – click to enlarge.

 


 

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

   
 

3 Responses to “Gold Gets Whacked – What Happens Next?”

  • Hans:

    PMs are now in the doctor’s office and hopefully not heading to ER.

  • Kreditanstalt:

    Gold: the manipulation will continue until confidence improves…

    The REAL manipulation isn’t The Fix: it’s the Comex paper tail wagging the gold dog and the fractional reserve futures gold schemes that are PERMITTED BY GOVERNMENT. Manipulation is institutionalized.

  • I have a tough time trying to understand the math behind how strength in the dollar hurts the gold price in US dollar terms IF the strength in the dollar is due to RELATIVE strength in a currency debasement war.

    Period 1: 1 ounce of gold fetches $1,000 US $US/EURO is 1:1 or $1.00 – E$ 1.00.

    Period 2: Assume no change in demand and no or minimal change in gold supply.

    1 oz. of gold. Supply of dollars has doubled to 2,000 dollars and supply of Euros doubles to 4,000 or E$ 2.00 = $US 1.00. The dollar doubles in value against the Euro. OK, now to buy gold in US dollars it is more expensive for Euro holders, but why should the dollar price of gold not rise if there is also huge debasement (in this example) against the dollar. Gold is tangible money vs. a blizzard of paper/electronic fiat money. I don’t see the economic logic behind how the dollar strengthening RELATIVE to another currency with both –currencies being devalued–greater supply created vs. gold–changes the price of gold in US dollars in the opposite direction. Please talk me off the ledge.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Gold Debate – Where Do Things Stand in the Gold Market?
      A Recurring Pattern When the gold price recently spiked up to approach the resistance area even Aunt Hilda, Freddy the town drunk, and his blind dog know about by now, a recurring pattern played out. The move toward resistance fanned excitement among gold bugs (which was conspicuously lacking previously). This proved immediately self-defeating - prices pulled back right away, as they have done almost every time when the slightest bit of enthusiasm emerged in the sector in recent...
  • Monetary U-Turn: When Will the Fed Start Easing Again? Incrementum Advisory Board Meeting Q1 2019
      Special Guest Trey Reik and Board Member Jim Rickards Discuss Fed Policy On occasion of its Q1 meeting in late January, the Incrementum Advisory Board was joined by special guest Trey Reik, the lead portfolio manager of the Sprott Institutional Gold & Precious Metal Strategy at Sprott USA since 2015 [ed note: as always, a PDF of the complete transcript can be downloaded further below].   Trey Reik of Sprott USA.   Also at the meeting, Jim Rickards, who is inter...
  • Watch Europe - Free Pass for the Elliott Wave European Financial Forecast
      Europe at an Important Juncture European economic fundamentals have deteriorated rather noticeably over the past year - essentially ever since the German DAX Index topped out in January 2018. Now, European stock markets have reached an important juncture from a technical perspective. Consider the charts of the Euro-Stoxx 50 Index and the DAX shown below:   The Euro-Stoxx 50 Index already peaked in early November 2017, the DAX followed suit in January 2018 – such divergent peaks...
  • Why Warren Buffett Should Buy Gold
      Riding the Tailwinds of Fiat Money Inflation to Fame and Fortune Warren Buffett bought his first shares of stock when he was 11 years old.  He saved up $114.75 and “went all in,” purchasing three shares of Cities Service preferred stock.  The day was March 11, 1942 – nearly 77 years ago.  Buffett recently reminisced about this purchase in his annual letter to shareholders:   “I had become a capitalist, and it felt good.”   The Oracle of Omaha – he was...
  • Fake Money’s Face Value Deceit
      Not the Brightest Tool in the Shed Shane Anthony Mele stumbled off the straight and narrow path many years ago.  One bad decision here.  Another there.  And he was neck deep in the smelly stuff. These missteps compounded over the years and also magnified his natural shortcomings.  Namely, that he’s a thief and – to be polite – a moron.   Over-educated he ain't: Shane Anthony Mele, whose expressive mug was captured by a Florida police photographer first in...
  • Rise of the Zombies - Precious Metals Supply and Demand
      Rise of the Zombies - Precious Metals Supply and Demand Last week, the prices of gold and silver fell $35 and ¢70, respectively. But what does that mean (other than woe unto anyone who owned silver futures with leverage)? The S&P 500 index and the euro was up a bit, though the yuan was flat and copper was down. Most notably, the spread between Treasury and junk yields fell. If the central banks can lower the risk of default premium, they can make everything unicorns and...
  • Bitcoin Bottom Building
      Defending 3,800 and a Swing Trade Play For one week, bulls have been defending the 3,800 USD value area with success. But on March 4th they had to give way to the constant pressure. Prices fell quickly to the 3,700 USD level. These extended times of range bound trading are typical for Bitcoin Bottom Building in sideways ranges. This 60 minute chart of Bitcoin shows (represented by the yellow candlestick wicks) how the bulls defended 3,800 USD :   BTCUSDT 60 minute chart...
  • The Magic Doesn't Always Work - Precious Metals Supply and Demand
      The Week Ends with a Surprise The weekly closing prices of the precious metals were up +$5 and +¢11. But this does not tell the full story of the trading action. Prices were dropping until Friday. More precisely, Friday 8am in New York, or 1pm in London.   Gold and silver - back in demand on Friday... [PT]   At that moment, a light cabal conspiring to jack the price struck traders began buying. The end result was the prices, especially of silver, rose on the day...
  • Intraweek Profit Opportunities
      In 6 of 10 Countries a Single Day Outperforms the Entire Week! In the Seasonal Insights issue of 13 February 2019 I presented a study illustrating the power of intraweek effects. The article was entitled “S&P 500 Index: A Single Day Beats the Entire Week!” The result of the study: if one had been invested exclusively during a single day of the week since 2000  – namely on Tuesday – one would have outperformed a buy and hold strategy, beating the broad market. Moreover,...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

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!