Moribund Meandering

Earlier this week, the USD gold price was pushed rather unceremoniously off its perch above the $1300 level, where it had been comfortably ensconced all year after its usual seasonal rally around the turn of the year. For a while it seemed as though the $1,300 level may actually hold, but persistent US dollar strength nixed that idea. Previously many observers (too many?) expected gold to finally break out from its lengthy consolidation pattern, but evidently the intense patience training session for gold bugs is set to continue for a while longer.


Luckless gold bug surrounded by false starts, with his only friend, a startled moose.


The above mentioned seasonal rally started from the second higher mid-December low since the beginning of the current Fed rate hike cycle. So far, gold seems to be doing the same thing at every December rate hike anniversary  – it declines into a mid December low, and then rallies sharply as soon as the Fed  announcement hits the wires (the sequence of lows since the first rate hike was: 2015: $1,045; 2016: $1,124; 2017: $1,238).

The fact that the gold price was almost $200 higher at the start of the seasonal rally than two years earlier was certainly encouraging – but although this year’s rally in gold was just as lively as the 2016-2017 turn-of-the-year advance, silver and precious metals stocks failed to properly mirror it (and obviously, it was a far cry from the early 2016 rocket ride).

This was a bit surprising: as we noted shortly after the December rate hike in Patterns, Cycles and Insider Activity (see part 1 and part 2 for the details), both gold stocks and silver had a lot going for them early this year. The former had seen an unprecedented surge in insider buying, while futures speculators abandoned the latter with, well, abandon.

Given their exceedingly poor record when reaching positioning extremes, it was fair to expect that the strongest seasonal month of the year for silver (namely January) may turn out to be particularly strong this year. It obviously wasn’t – although silver moved higher by slightly more than $2, this move fell well short of the $3 rally (from almost the same starting point) in the same time period a year earlier.

For quite some time, the HUI and XAU indexes have mimicked the silver price rather than the gold price; their performance in the strong seasonal period was therefore disappointing as well. Since then, it has become even more so. The chart below shows the gold price and the HUI Index over the past year – we have penciled in several bearish and bullish divergences.


First the HUI put in a rather glaring negative divergence against gold between February and early September 2017 – the two seasonal high points of that year. This was followed by a positive divergence relative to the early July low and the mid-December rate hike low (note here that it doesn’t matter whether the HUI makes a higher or lower low relative to gold – it is only important that two lows diverge against each other). After the weak seasonal rally from mid-December 2017 to late January 2018 (it didn’t even make it into early February, which it normally “should have” done) the HUI lost even more relative strength. In fact, its relative strength vs. gold has been nothing short of dismal. The only good thing we can glean from this chart at the moment is that the most recent downswing in gold has actually generated a positive divergence with the HUI. For now, anyway –  we cannot be certain yet that it will hold.


In late October of last year the HUI-gold ratio broke through a support level that held from late 2016 until then – and has yet to regain it. It may not feel like it, but the ratio has actually begun to improve since making a low in mid March. It is now back at the low it reached in late 2000, after a 20 year bear market (seriously).


The sharp increase in the HUI-gold ratio in early 2016 was supported by strength in silver, and a decidedly more bullish macro-economic fundamental backdrop for gold than the one in place currently. The main point is though that expansions in the ratio are bullish, while contractions are bearish. The conclusion in context with the current situation is: the fact that the “support shelf” of the 2016-2017 period has given way is negative, but a minor positive signal has developed  fairly recently, as the ratio has begun to recover – something that hasn’t been much remarked upon as far as we know.  Admittedly, it is not much of a recovery yet and it may well turn out to be a temporary fluke, but one always has to consider such things in context. Gold’s slide below the “psychological” 1300 level has received a lot of attention, but this contradictory move hasn’t. Information that is not getting much attention often turns out to be important (what everybody knows already is usually not worth knowing and vice versa).


One tidbit worth mentioning is that there continues to be a rather wide dispersion of performance within the gold sector. Some stocks behave in line with how one would expect them to behave in light of a fairly strong gold price, while others underperform quite excessively. Company-specific developments are driving these performance differences in most cases, but they often seem way too large relative to the underlying fundamental data or relative to guidance.

It seems possible that the quarterly re-weighting of indexes and ETF components is exacerbating the situation due to the huge increase in passive investment strategies (re-weightings may have a more noticeable effect on stocks in this relatively small and illiquid sector than on stocks with a big market capitalization and a lot of trading volume). Regardless of the reason, it is clear that the performance dispersion within the sector since the mid 2016 interim peak has expanded quite a bit.


Macro-Fundamentals Conundrum

Slightly over a year ago, we discussed the macro-economic drivers of the gold price, noting that most of them were either neutral or bearish at the time (this was in early April 2017 – see: An Overview of Macroeconomic Price Drivers). This has not changed – on the contrary, most of these indicators look even more bearish today. Take for example real interest rates – or rather, our best market-based proxy for real interest rates, the TIPS yield:


Inverted 5-year TIPS yield vs. the gold price (note: the scale for TIPS yields on the left hand side must be multiplied with [-1] to make sense; currently the yield is at a positive 78 basis points). For a very long time these two data series were extremely well aligned – but they have begun to drift apart quite noticeably since early 2017.


Other macro-economic drivers of the gold price such as credit spreads, the steepness of the yield curve, risk asset price trends, the BKX-SPX ratio (as a proxy for faith in the solvency of the banking system) or money supply growth are all gold-bearish at the moment. The trend in commodity prices – surprisingly – remains somewhat constructive, but not wildly so (and it stands on shaky ground in view of the strengthening US dollar).

Moreover, to the extent that firm commodity prices can be said to be indicative of strong economic confidence, one could even call their strength somewhat detrimental at the moment. Certainly all indicators of economic confidence exhibit a lot of strength: faith in monetary authorities has been fully restored, as has the belief that excessive government debt poses no threat whatsoever (apart from “special cases” on the outermost periphery, such as Venezuela).

At this point, the only trend we can discern that is unequivocally gold-bullish (for now) is the re-acceleration in the US federal deficit. Apart from this, only the downtrend in the US dollar appeared to be supportive for a while, but even that has now changed. In fact, the recent bout of gold weakness was no doubt largely triggered by US dollar strength. Here is a brief look at the technical picture:


Dollar Index, DXY: On the weekly chart on the left, it seems that there is more room to run, at least until resistance near the 95 level comes into play. On the daily chart DXY seems short term overbought and a small momentum divergence has emerged. In terms of futures positioning, the previously extremely large speculative net long positions in the euro and speculative net short positions in DXY have declined a bit in recent weeks, but not by as much as such a move would normally suggest. Positioning data in precious metals futures look actually significantly more constructive by comparison.


It is obvious from a fundamental perspective that the US dollar enjoys a large and growing advantage in terms of its interest rate differential vs. euro and yen. Money supply growth is decelerating in all major currency areas, but the deceleration is most pronounced in the US (the Fed has a head start in this respect as well). On the other hand, price inflation in CPI terms is strongest in the US as well, which detracts from the interest rate advantage.

Moreover, since euro and yen both are likely used as funding currencies for carry trades, any wobbles in risk assets are bound to lead to unexpected bouts of strength in them. Japan and the euro area are net external creditors and financial market and/or economic problems are occasionally prone to provoke repatriation flows – which are sometimes quite persistent (recall that the yen has often defied conventional wisdom regarding the effect of rate differentials in the past).

A potentially interesting development is the recent weakness in various emerging market currencies. The plunge in the Argentinian peso and the Turkish lira has “infected” other EM currencies. These currencies have begun to weaken across the board,  though not all to the same extent.

What makes this interesting is that it is very often a late stage phenomenon (i.e., it tends to happen at the tail end of dollar rallies), which tends to culminate in blow-off moves and the emergence of crisis conditions in various countries. Very often gold will weaken as these moves play out and reverse course sharply thereafter. Obviously, there is no guarantee that things will play out in the same manner every time, it is just something that has frequently happened in the past.


Argentine peso and Turkish lira – while these are essentially perennial collapse currencies, the recent acceleration in their demise is noteworthy.


One could probably state in summary, that there is very little to lend support to gold at the moment – and yet, as Keith Weiner points out regularly of late, all indications are that gold hoarders are actually quite busy hoarding. His calculated theoretical “fundamental price” (which is based on comparing futures with spot prices, and determining the profit from entering carry trades or doing the opposite) has moved well above the market price this year.

Recently the gap between the two prices has in fact widened to a rarely seen extent (a quick glance at a longer term chart suggests that a roughly similar difference was only seen in late 2007 and on two occasions in 2008 – early 2016 came close):


Fundamental vs. market price – a wide gap has opened up this year.


What to make of this seeming contradiction between the signals from macro-economic drivers and the actions of market participants? Note here that the “theoretical” fundamental price is derived from the activity of market participants just as the market price obviously is. The only answer that makes sense to us is that market participants (particularly those buying and selling physical gold) “see” something that is not evident in the data yet.

This has been going on for quite some time, and perhaps they will change their mind again, but why should they? After all, one can make an educated guess as to what makes people want to hold gold, and if anything, the possible reasons have become more rather than less relevant. Lastly, on occasions when the  fundamental/market price spread has widened as much as it recently has, the theoretical price has tended to lead the market price.


Next: A Closer Look at Positioning

Things become even more interesting when looking at recent positioning data in precious metals – we will inter alia look at those in the next post, which should be published shortly. We will also discuss the odd HUI-silver correlation mentioned above in more detail. Stay tuned.


Charts by: StockCharts, St. Louis Fed, Monetary Metals,




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


2 Responses to “Gold and Gold Stocks – Conundrum Alert”

  • utopiacowboy:

    Yes you’re right. I am regarding the difficulties with precious metals and mining stocks as an exercise in patience. It may take five or ten years but this house of cards can’t continue.

  • Bam_Man:

    Having often heard the Central Bankers’ latest asset inflation scheme referred to as “The Everything Bubble”, I would suggest that calling it “The Everything But Gold and Silver Bubble” would be far more accurate.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Is the Canary in the Gold Mine Coming to Life Again?
      A Chirp from the Deep Level Mines Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal - and hence highly leveraged to the gold price - South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).   Mining engineer equipped with bio-sensor Photo credit: Hulton Archive   As we write these...
  • Fed Credit and the US Money Supply – The Liquidity Drain Accelerates
      Federal Reserve Credit Contracts Further We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”).   The Fed has clearly changed course under Jerome Powell...
  • Are Credit Spreads Still a Leading Indicator for the Stock Market?
      A Well-Established Tradition Seemingly out of the blue, equities suffered a few bad hair days recently. As regular readers know, we have long argued that one should expect corrections in the form of mini-crashes to strike with very little advance warning, due to issues related to market structure and the unique post “QE” environment. Credit spreads are traditionally a fairly reliable early warning indicator for stocks and the economy (and incidentally for gold as well). Here is a...
  • The Gold Standard: Protector of Individual Liberty and Economic Prosperity
      A Piece of Paper Alone Cannot Secure Liberty The idea of a constitution and/or written legislation to secure individual rights so beloved by conservatives and among many libertarians has proven to be a myth. The US Constitution and all those that have been written and ratified in its wake throughout the world have done little to protect individual liberties or keep a check on State largesse.   Sound money vs. a piece of paper – which is the better guarantor of liberty?...
  • Fed President Kashkari Hears Voices – Are They Lying?
      Orchestrated Larceny The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us.   Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT]   Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much...
  • US Stocks and Bonds Get Clocked in Tandem
      A Surprise Rout in the Bond Market At the time of writing, the stock market is recovering from a fairly steep (by recent standards) intraday sell-off. We have no idea where it will close, but we would argue that even a recovery into the close won't alter the status of today's action – it is a typical warning shot. Here is what makes the sell-off unique:   30 year bond and 10-year note yields have broken out from a lengthy consolidation pattern. This has actually surprised us, as...
  • Switzerland, Model of Freedom & Wealth Moving East – Interviews with Claudio Grass
      Sarah Westall Interviews Claudio Grass Last month our friend Claudio Grass, roving Mises Institute Ambassador and a Switzerland-based investment advisor specializing in precious metals, was interviewed by Sarah Westall for her Business Game Changers channel.   Sarah Westall and Claudio Grass   There are two interviews, both of which are probably of interest to our readers. The first one focuses on Switzerland with its unique, well-developed system of  direct...
  • Exaggerated Economic Growth of the Third World
      Exciting Visions of a Bright Future Fund Managers, economists and politicians agree on the exciting future they see in the Third World. According to them, the engine of the world’s economic growth has moved from the West to what were once the poverty-stricken societies of the Third World. They feel mushy about the rapid increase in the size of the Middle Class in the Third World, and how poverty is becoming history.   GDP of India vs. UK in 2016 – crossing...
  • Choking On the Salt of Debt
      Life After ZIRP Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death.  At the time, the monetary order was approach peak ZIRP.   Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]   We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of...
  • Why You Should Expect the Unexpected
      End of the Road The confluence of factors that influence market prices are vast and variable.  One moment patterns and relationships are so pronounced you can set a cornerstone by them.  The next moment they vanish like smoke in the wind. One thing that makes trading stocks so confounding is that the buy and sell points appear so obvious in hindsight.  When examining a stock’s price chart over a multi-year duration the wave movements appear to be almost predictable.   The...
  • How Dangerous is the Month of October?
      A Month with a Bad Reputation A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.   The road to October... not much happens at first - until it...
  • Yield Curve Compression - Precious Metals Supply and Demand
      Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.   The Federal Reserve – carefully inching forward to Bustville   People...

Support Acting Man

Item Guides

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!