The Bull Market is Back – at Least in Non-USD Terms

The gold price most traders are focused on is the dollar price of gold – this is no wonder, as the COMEX is the most important price setting market for gold, and gold is internationally mainly traded in dollars. It is often useful to abandon this dollar-centric view, as for the rest of the world’s population gold’s trend in local currencies is obviously of greater importance.

Since gold is primarily a monetary asset, the main question for someone residing in a European or Asian country is whether the purchasing power of gold is increasing against the purchasing power of the domestic fiat currency. Interest rates (better: real interest rates) naturally play an important role in this, as their height determines the greatest portion of the opportunity cost of holding gold (the remainder is related to storage costs and where applicable, insurance costs).


This is not A final shot, needs Coasters from 616 To fill in right 2


As the chart further below shows, due to the recent combination of dollar and gold strength, gold has broken out, respectively entered an uptrend, in euro and yen terms over the past year. In dollar terms, a similar breakout over lateral resistance has yet to occur. However, experience shows that the gold price in foreign currency terms often leads the US dollar gold price, which is why it makes sense to keep an eye on such developments.

Even in USD terms a few higher lows have been put in recently and the 50 day moving average has turned up after declining for several months, so the technical picture has improved somewhat, if in fits and starts. It is still too early to rule out an eventual final washout to the “technical attractor”, which is the 2008 high near $1,040, but the probability of this happening in the near term has decreased significantly.

This is also suggested by the recent trend in gold’s “real price”, i.e., its trend relative to commodities. Gold has bottomed against commodities in April of 2014, and the new uptrend in this ratio has recently accelerated. This is important for two reasons: for one thing, it is a subtle sign of declining economic confidence, which is quite in contrast to the performance of the stock market, but seems to be confirmed by the action in treasury bonds. Secondly, an increase in the gold price relative to commodities usually indicates that the profit margins of gold mining companies are rising as well. The gold sector tends to exhibit a long term negative correlation with the stock market (even though the two can often trend in the same direction over shorter time horizons) precisely because the earnings of gold mining companies tend to rise just as the earnings of other companies are coming under pressure.


1-Gold in various currenciesGold in dollar, euro and yen terms. In dollar terms the recent uptrend still looks quite weak, but in terms of euro and yen it looks like a solid reversal has been put in place – click to enlarge.


2-Gold vs commodities
Gold relative to commodities: the “real price” of gold has been in an uptrend since April 2014, and this has recently been confirmed by a breakout in the ratio above a consolidation area that it has spent several months in. The most recent move higher was mainly a result of the decline in crude oil prices – click to enlarge.


Gold Stocks Closing in on Resistance

Last year we discussed the squall of panic selling in gold stocks in late October /early November more or less in real time in great detail (see: “An Anti-Bubble Blow-Off in the Gold Sector”). As we pointed out, the decline had all the hallmarks of a capitulation, and in hindsight it has turned that at least “a” low was indeed put in right then and there. This was followed by a retest in December – the time when retail tax loss selling in weak sectors is most pronounced. The early November low was established shortly after the bulk of institutional tax loss selling was done.

Since then, the gold sector has recovered somewhat, exhibiting relative strength versus gold in the process. It is now approaching a zone of resistance formed by the 2013 and early 2014 lows. Obviously, a move above this resistance zone would be a good sign, but it is probably going to involve some backing and filling, even if it does eventually happen.

We want to briefly comment on the fact that a number of gold stocks have recently received downgrades. To our mind these downgrades are probably a late cycle contrarian phenomenon, mainly because they make no sense at this juncture. We should rephrase that: they only make sense if one not only assumes that gold will resume its decline, but also that the decline will exceed the expansion in gold mining margins that has been underway in recent quarters and has noticeably accelerated in Q 4 2014.

Energy is a major input cost in gold mining (especially for open pit mines) and the cost of energy has just declined rather precipitously, concurrently with a recovery in the gold price. Other input costs are falling as well. The once tight labor situation in the mining sector has become a lot more relaxed due to the decline in gold and commodity prices since 2011. Demand for inputs like industrial tires, chemical reagents, timber, steel, etc. has decreased with the softening of the global economy and the prices for these items have come down as a result.

Let us just say that there have surely been better moments to downgrade gold stocks. The potentially most useful of these opportunities were not recognized at the time they presented themselves. On the contrary, we recall that in the weeks just prior to gold’s 2011 peak, numerous upgrades were dispensed.


3-HUIThe HUI Index and the HUI-gold ratio. The lateral support/resistance lines are derived from highs and lows further in the past – click to enlarge.



Since gold has not broken above resistance in dollar terms yet and gold stocks still have to achieve a solid breakout as well, the signs that a medium/ long term bottom may be in are still tentative. However, the technical backdrop has clearly improved in light of gold entering an uptrend in major foreign currencies and against commodities. This is more or less in line with what happened at the beginning of the bull market in 2000-2001 (incidentally, the ratios of gold stocks to the broad stock market and various other market sectors have recently returned to the levels of 2000 and turned up from there).

The fundamental backdrop for gold is not unambiguously bullish yet – just as some indicators have turned more bullish, others have turned more bearish, leaving an overall neutral situation in place. So there is still a wide range of possible outcomes, but considering the capitulation-like declines seen late last year, it seems to us that short to medium term strength in the sector is more likely.


Charts by: Stockcharts




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:

  • As the Madness Turns
      A Growing Gap The first quarter of 2019 is over and done.  But before we say good riddance.  Some reflection is in order.  To this we offer two discrete metrics.  Gross domestic product and government debt.   US nominal GDP vs total federal debt (in millions of USD) – government debt has exceeded  total economic output for the first time in Q4 2012 and since then its relative growth trajectory has increased – and it seems the gap is set to widen further....
  • A Trip Down Memory Lane – 1928-1929 vs. 2018-2019
      Boom Times Compared It has become abundantly clear by now that the late 2018 swoon was not yet the beginning of the end of the stock market bubble – at least not right away. While money supply growth continues to decelerate, the technical underpinnings of the rally from the late December low were actually quite strong – in particular, new highs in the cumulative NYSE A/D line indicate that it was broad-based.   Cumulative NYSE A/D line vs. SPX – normally the A/D line...
  • Long Term Stock Market Sentiment Remains as Lopsided as Ever 
      Investors are Oblivious to the Market's Downside Potential This is a brief update on a number of sentiment/positioning indicators we have frequently discussed in these pages in the past. In this missive our focus is exclusively on indicators that are of medium to long-term relevance to prospective stock market returns. Such indicators are not really useful for the purpose of market timing -  instead they are telling us something about the likely duration and severity of the bust that...
  • Debt Growth and Capital Consumption - Precious Metals Supply and Demand
      A Worrisome Trend If you read gold analysis much, you will come across two ideas. One, inflation so-called (rising consumer prices) is not only running much higher than the official statistic, but is about to really start skyrocketing. Two, buy gold because gold will hedge it. That is, the price of gold will go up as fast, or faster, than the price of gold.   CPI monthly since 1914, annualized rate of change. In recent years CPI was relatively tame despite a vast increase in the...
  • Unsolicited Advice to Fed Chair Powell
      Unsolicited Advice to Fed Chair Powell American businesses over the past decade have taken a most unsettling turn.  According to research from the Securities Industry and Financial Markets Association, as of November 2018, non-financial corporate debt has grown to more than $9.1 trillion [ed note: this number refers to securitized debt and business loans, other corporate liabilities would add an additional $11 trillion for a total of $20.5 trillion].   US non-financial corporate...
  • The Liquidity Drought Gets Worse
      Money Supply Growth Continues to Falter Ostensibly the stock market has rallied because the Fed promised to maintain an easy monetary policy. To be sure, interest rate hikes have been put on hold for the time being and the balance sheet contraction (a.k.a.“quantitative tightening”) will be terminated much earlier than originally envisaged. And yet, the year-on-year growth rate of the true broad money supply keeps declining noticeably.   The year-on-year growth rates of...
  • What Were They Thinking?
      Learning From Other People's Mistakes is Cheaper One benefit of hindsight is that it imparts a cheap superiority over the past blunders of others.  We certainly make more mistakes than we’d care to admit.  Why not look down our nose and acquire some lessons learned from the mistakes of others?   Bitcoin, weekly. The late 2017 peak is completely obvious in hindsight... [PT]   A simple record of the collective delusions from the past can be quickly garnered from...
  • The Gold-Silver Ratio Continues to Rise - Precious Metals Supply and Demand
      Is Silver Hard of Hearing? The price of gold inched down, but the price of silver footed down (if we may be permitted a little humor that may not make sense to metric system people). For the gold-silver ratio to be this high, it means one of two things. It could be that speculators are avoiding the monetary metals and metal stackers are depressed. Or that something is going on in the economy, to drive demand for the metals in different directions.   As a rule the gold silver...
  • The Effect of Earnings Season on Seasonal Price Patterns
      Earnings Lottery Shareholders are are probably asking themselves every quarter how the earnings of companies in their portfolios will turn out. Whether they will beat or miss analyst expectations often seems akin to a lottery.   The beatings will continue until morale improves... [PT]   However, what is not akin to a lottery are the seasonal trends of corporate earnings and stock prices. Thus breweries will usually report stronger quarterly earnings after the...
  • Bankrupting Coffee Shops - Precious Metals Supply and Demand
      Coffee, Milk and Gold Last week was holiday-shorted due to Good Friday (it’s not an official holiday in the US, but it is in the UK. And this week’s report is a day late due to Easter Monday). The price of gold dropped $15, but the price of silver rose ¢4. Perhaps silver traders got word that we are paying interest on silver, which gives people a reason to hold silver? J   A silver bar plus interest...  [PT]   The discussion in the opening essay [which can be...
  • Kashmir: The Constant Conflict
      Threats of Nuclear War On February 26, 2019, the Indian Air Force, for the first time since 1971, conducted a raid inside Pakistan, and allegedly hit a terrorist training camp, killing more than 250 terrorists. Pakistan showed photographs of damage to a tree or two. According to Pakistani officials, no one died and no infrastructure was damaged.   Mirage 2000 warplane of the Indian Air Force in medias res. [PT] Photo credit:   It is hard to...

Support Acting Man

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]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

Buy Silver Now!
Buy Gold Now!