Technical Backdrop

If only we could get a dime for every bearish article on gold that has been published over the past two weeks…but one can’t have everything. When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, it if makes it to 90% down, it will still be a harrowing experience in the short term.

We like these catastrophes because they usually mean “the stuff is cheap and there is probably something people don’t see”. That’s definitely the case here, since one of the things that has been routinely ignored is the improvement in costs and cash flows that is slowly but surely progressing at many gold producers.

 

MponengGoing for the gold: rock driller at the world deepest gold mine, Mponeng, 40 miles from Johannesburg. You could stack 10 Empire State buildings on top of each other to cover the distance from its deepest point to the surface. It uses as much electricity as city of 400,000 people.

Photo credit: Graeme Williams / The Wall Street Journal / Redux

 

As always we will try to focus on slightly different things than in our last update on the sector, but there is one chart we want to show the current state of, namely our “divergences watch” chart.

 

1-Divergences, completeThe HUI-gold ratio, the HUI and gold. So far, the “double divergence” remains intact – with alternating diverging lows. The support on which the HUI sits looks a bit vulnerable because it has been visited so often, but positioning and sentiment are more than ripe for a good rebound – click to enlarge.

 

While we’re waiting for the turning point, we are always interested in the potential for tradable rallies until it happens, because they tend to be so big in this sector. Just look at the last move from 104 to 140 in the HUI – that’s as if the DJIA went from its current level of 17,792 points to 24,000 points in just two and a half weeks. Will it do that? We doubt it. The HUI can – and not only that: it can rally that much and still be a few light years below its 200 day moving average. In short, these “small bounces” are really gigantic, because prices are so compressed and the sector is so small and illiquid.

Below is another chart worth looking at again for a change, namely gold in terms of the two major non-USD currencies. We’ve added gold vs. commodities to it for the sake of completeness (and not least because gold has made a record high against them in 2015):

 

2-Gold vs. commodities and non_USD currenciesGold in terms of commodities, the euro and the yen. If one looks beyond the usual dollar-centric view, then gold is actually acting OK – not great, but OK. Except against commodities, relative to which it has put in a new record high this year – click to enlarge.

 

Sentiment and Positioning

The commitments of traders reports of the past two weeks have shown a swing in the net speculative position of more than 90,000 contracts (a 40,000 contract wing was recorded last week, shown in the table below, after 50K the previous week). Given that this has happened over just this short time span, we know that the vast bulk of the selling and short-selling since the most recent peak occurred at prices below $1,100. Readers may recall that we mentioned in our last update that this particular “give-up” was still missing in the data. Now it has arrived.

 

3-CoT tableLast week’s CoT report with the changes highlighted – click to enlarge.

 

As you can see, small speculators (“non-reportables”) have swung to a net short position again – for the third time since late 2014. In chart form it looks like this:

 

4-Gold CoT-chartGold hedgers net position (blue), which is the inverse of the total speculative net position, and small speculator net position (in red). This is the third time since late 2014 when small speculators have gone net short. The late 2014 occasion in turn was the first time this had happened in more than 14 years – click to enlarge.

 

We were actually curious when – apart from the two earlier occasions in 2014 and 2015 – small speculators were net short more than 5,000 contracts. So we looked. It happened on February 2 1993. Not only was that 22 years ago, it was also a case of bad timing.

Here is another sentiment/positioning related chart we haven’t updated in a while. It shows CEF’s discount to NAV (CEF is a closed-end fund holding gold and silver bullion) as well as Rydex precious metals assets and cumulative flows. Note, all these charts are telling us is that the mood is really very bad. This is however important, as it usually means there is limited downside and good short covering potential exists. The chart is a longer term one, which also shows that gold in dollar terms is very close to a lateral support level established in 2008.

Meanwhile, CEF’s discount to NAV is back to 11.4%, at the low end of its range and Rydex precious metals fund assets are down by roughly 92% from their peak. We can infer that interest in gold stocks is a tiny bit subdued at the moment.

 

5-Gold sentiment-1Gold vs. CEF’s discount to NAV plus Rydex precious metals assets and cumulative cash flows – click to enlarge.

 

A Blast from the Past

As an aside to all this, we recently worked out that an average of 557 tons of gold has traded in London every day over the past year. That’s not exactly peanuts. The annual size of the gold market is around $20 trillion. Now you know why it makes absolutely no sense to worry about mine supply or jewelry demand or whether India imports 200 tons more or less over an entire year, or any such nonsense, as the guys from the WGC and the CPM Group do. That’s just nuts.

However, we also wanted to show you a chart comparison we have discussed in the past. This time we have made the effort to actually splice an overlay together (inspired by our friend Dimitri Speck). As we have mentioned some time ago already, the gold market since 2000 has been an eerie copy of the 1970s gold market, only everything seems to be taking about twice as long. As it turns out, it is actually taking approximately 2.1 times as long (so far, anyway). The percentage gains and losses are almost similar – and so are the patterns.

Below is a chart aligning the late 1974 peak with the September 2011 peak – the mid 1970s bear market/ correction is stretched by a factor of 2.1:

 

6-Gold-peaks comparisonHand in glove: bear market since 2011 compared to a visually stretched version of the mid 1970s bear market.

 

The interesting thing about this is that the fundamental backdrop is in many ways quite different. For instance, no-one worried about deflation in the 1970s, while today that seems to be the only thing everyone is worried about – even while money printing continues at full blast, at least in Europe and Japan. The main reason for the time compression observed in the 1970s bull market (gold would go on to rise by another 850% from its 1976 low) is of course that the gold price had been fixed before Nixon defaulted (“temporarily” as he assured everyone) and axed the dollar-gold convertibility.

Anyway, this goes to show that the shape and extent of both bull and bear markets is often quite similar, as their fluctuations are driven by the short term decisions made by greedy and/or fearful traders at any given time. The reasons (or rationalizations) for the decisions don’t seem to matter in terms of these characteristics.

 

Conclusion

A number of potential short term triggers are dead ahead. The payrolls report comes in early December and in mid December we will find out if the Fed will finally grace us with the meaningless gesture of a 25 basis points (or maybe 12.5 basis points?) rate hike from the current level of zilch. The attention given to the former event is of course directly related to the latter.

As we have mentioned previously, the threat of a rate hike has done a lot of damage to the gold market in USD terms. The actual hike could easily become a “buy the news” event (the same was true of the end of QE3, which was greeted by a $200 or so rally if memory serves) – especially given the market’s current oversold and positioning/ sentiment status.

 

Charts and tables by: StockCharts, SentimenTrader, CFTC, St. Louis Federal Reserve Research

 

 

 

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:

  • The Federal Reserve is a Barbarous Relic
      The Sky is Falling   “We believe monetary policy is in a good place.” – Federal Reserve Chairman Jerome Powell, October 30, 2019.   The man from the good place. "As I was going up the stair, I met a man who wasn't there. He wasn't there again today, Oh how I wish he'd go away!" [PT]   Ptolemy I Soter, in his history of the wars of Alexander the Great, related an episode from Alexander’s 334 BC compact with the Celts ‘who dwelt by the Ionian...
  • Incrementum 2019 Gold Chart Book
      The Most Comprehensive Collection of Gold Charts Our friends at Incrementum have just published their newest Gold Chart Book, a complement to the annual “In Gold We Trust” report. A download link to the chart book is provided below.   As of late 2019 an ounce of gold will get you 115 liters of beer at the Munich October Fest – a 7-year high. Cheers!   The Incrementum Gold Chart Book is easily the most comprehensive collection of charts related to or relevant...
  • The Golden Autumn Season – One of the Most Reliable Seasonal Patterns Begins
      The Strongest Seasonal Stock Market Trend Readers may already have guessed: when the vibrant colors of the autumn leaves are revealed in all their splendor, the strongest seasonal period of the year begins in the stock market – namely the year-end rally.   Will Santa wake up this year? Last year he was clearly missing in action – but that is actually the exception, not the rule [PT]   Stocks typically rise in this time period. However, there are questions, such...
  • Riding the Type 3 Mega Market Melt Up Train
      Beta-driven Fantasy The decade long bull market run, aside from making everyone ridiculously rich, has opened up a new array of competencies. The proliferation of ETFs, for instance, has precipitated a heyday for the ETF Analyst. So, too, blind faith in data has prompted the rise of Psychic Quants... who see the future by modeling the past.   Gandalf, quant of Middle-Earth, dispensing sage advice. [PT]   For the big financial outfits, optimizing systematic –...
  • Maybe the West Should Adopt Iran’s Nuclear Weapons Policy
      The Rise of Total War Prior to the modern age, when war was engaged in, combatants, for the most part, acted by a code of conduct which attempted to minimize civilian deaths and the destruction of non-participants’ property. With the onset of the democratic age and the idea of “total war” such modes of conduct have tragically fallen by the wayside, the consequence of which has made warfare far more bloody and destructive.   Iranian Seiji-2 missile. Of course, we...
  • Is the Fed Secretly Bailing Out a Major Bank?
      Prettifying Toxic Waste The promise of something for nothing is always an enticing proposition. Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance?  So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?   The yield-chasing hamster wheel... [PT]   Thus, smart fellows go after it; pursuing financial innovation with unyielding devotion.  The underlying...
  • Bitcoin Moonshot - Precious Metals Supply and Demand
      Bitcoin Gets Juiced The prices of gold and silver were up $19 and $0.48 respectively last week. But that’s not where the massive inpouring of groceries went.   When Friday began (Arizona time), Bitcoin’s purchasing power was under 75 grocery units (assuming a grocery unit is $100). By evening, speculators added 25 more grocery units to the same unit of bitcoin.   Bitcoin, daily – shortly after breaking below an obvious lateral support level, Bitcoin did an...
  • Maurice Jackson Interviews Brien Lundin and Jayant Bhandari
      Two Interesting Recent P&P Interviews Our friend Maurice Jackson of Proven and Probable has recently conducted two interviews which we believe will be of interest to our readers. The first interview  is with Brien Lundin, the president of Jefferson Financial, host of the famed New Orleans Investment Conference and publisher & editor of the Gold Newsletter – an investment newsletter that has been around for almost five decades, which actually makes it the longest-running...
  • Targeting nGDP Targeting – Precious Metals Supply and Demand
      Everybody Has a Plan Not too long ago, we wrote about the so called Modern Monetary so called Theory (MMT). It is not modern, and it is not a theory. We called it a cargo cult. You’d think that everyone would know that donning fake headphones made of coconut shells, and waving tiki torches will not summon airplanes loaded with cargo. At least the people who believe in this have the excuse of being illiterate.   A few images documenting cargo cults on the island of...
  • Volatility Galore - Precious Metals Supply and Demand
      Fun and Regret Ex Nihilo The price of gold dropped last week, but not calamitously. From $1514 to $1459, or -$55. The price of silver dropped. Calamitously. From $18.08 to $16.75, or -$1.33. -3.6% vs -7.4%. Once again, silver proves to be volatile relative to gold.   Silver jumped off a cliff again last week – the chart formation nevertheless continues to look corrective. [PT]   In standard vernacular, the metals lost purchasing power this week. Purchasing power can...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

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!