"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

Trader Dan's Work is NOW AVAILABLE AT WWW.TRADERDAN.NET



Friday, January 25, 2013

Technical Failure Continues to Haunt Gold

continued selling in gold after yesterday's confirmation of a failure to take out overhead resistance near the 50 day moving average and its further retreat from psychological resistance at the $1700 level.

Today price once again fell below the 200 day moving average as the double whammy from long liquidation from short-term oriented bulls, in conjunction with fresh short selling from speculators, has overwhelmed bids coming from the swap dealers and bullion banks who are covering previoulsy established shorts up near the overhead resistance zone.


The RSI continues to confirm the move lower within the broad sideways trading pattern that has now existed since the middle of December last year.

It is the same story for the present - speculators are not interested in gold or in anything related to gold, such as shares right now, as they are after a chance to secure better returns on investment into the broader equity markets.

Once again the S&P 500 has made yet another fresh 5 year high! (at least the bond market is finally showing some signs of rationality as it is sinking sharply). The yield on the TEn Year is knocking on the door of a 9 month high right now as it is currently sitting at 1.934%.

What is missing in gold and in the gold shares is money flows. It is really that simple. Heck, even a crude oil price that is rising, in spite of not especially bullish fundamentals, cannot seem to generate any inflation-based buying in gold right now. It is simply off the radar screen of the big hedge funds and momentum based buyers. I am not sure what it will take to recapture their enthusiasm from a fundamental standpoint at this juncture but from a technical standpoint it still goes back to the fact that gold must get a "17" handle in front of it to generate any bullish excitement.

Downside support still remains in place between $1640-$1630 on the chart having not as of yet been tested. One can assume that the same buyers whose actions have forged out that technical base of support still remain viable but we will need to see evidence of their eagerness to buy before just presuming that it is so.

Again, there is no help whatsoever coming from the mining shares which continue to effectively undercut any hint of bullish sentiment that might dare to form in the actual metals as far as the Comex futures go. I am beginning to get a sense of real capitulation selling in the mining sector. The despair, anger, frustration and downright disgust being expressed by even some long term holders of the miners is growing, rightfully so I might add as money invested in them was lost opportunity elsewhere. We will continue to look for signs therefore of a lasting bottom in that sector but so far, I do not see it as of now.

The HUI is perched periously atop major support - if that gives way for any reason - and it does not matter what that reason might or might not be at this point - the final washout in the mining sector will be underway with the transition to some very strong hands. It should be kept in mind however strong hands are "strong" because they are willing and ABLE to sit on trading losses long after weaker and less capitalized holders have thrown in the towel.

Just be careful about willy-nilly buying dips in price in these mining shares right now. Wait until you see some evidence that the selling has been exhausted. Generally speaking, that tends to take the form of a spike bottom in the gold mining shares but of course, no two days in trading are ever the same. That is what makes it difficult and requires constant diligence and flexibility.

Note on the chart below, a monthly chart, that the HUI is pressing very hard against that support level coming in near the 400 level. It is imperative that it does not close below that level before this month ends or else it will more than likely move lower and test the 370-360 level.




Considering that the price of gold was sitting closer to $1100 back in January 2010 when the HUI last had a MONTHLY CLOSE below this level, it is astonishing how pitiful the mining sector has performed especially seeing that gold is trading over $500 an ounce higher than it was back then. Why in the hell cannot some of these miners show any significantly stronger profits and offer a better return on investment for their shareholders? Thankfully there are some well run companies out there but their stocks tend to get lumped into the same outhouse as the rest of them do. I have said it before and will say it again, unless the CEO's of some of these mining companies get serious about returning shareholders value (and that means making hard decisions to rein in costs and become more efficient) they should not be surprised to see those same shareholders voting with their feet and taking their hard earned investment dollars elsewhere.

17 comments:

  1. Hi Dan,
    I'm one of those saps who (after paying zero attention most of my working life) decided in 2008 to figure out what the hell is going on and decided gold/silver/mining shares were the place to be. Take a snapshot today and I am screwed like I was then. I am still holding on (a little longer) hoping Bens' bubblicious QE finds a couple of these dogs I own. I am, however, growing more convinced that physical gold is the answer. Not as an investment but a place to park savings. Thank you so much, always enjoy hearing you on KWN!

    ReplyDelete
    Replies
    1. JP Coltrane;

      I feel your pain there. Yes, the shares are speculative in nature while the metal is insurance.

      One of the reasons I try to keep writing, which at times will wear on a person, and doing the interviews, is to help some of the folks out there learn how to read markets and hopefully learn to be a bit more proactive on their investment/trading strategies. The buy and hold philosophy can be very difficult to abide by unless you have a LONG TERM, and I do mean, LONG TERM horizon in mind.

      I do believe that one can time the markets if they learn the necessary skills and learn how to recognize where money is flowing and where it is not. The idea in investing is to make money. You cannot do that if the rest of the investing class is not going along with you on the ride. Trying to catch exact bottom and exact tops is generally fruitless but one can certainly discern a trend and catch 70-80% of that trend and profit accordingly if they learn how to spot it!

      Sincere best to you,
      Dan

      Delete
  2. "Considering that the price of gold was sitting closer to $1100 back in January 2010 when the HUI last had a MONTHLY CLOSE below this level, it is astonishing how pitiful the mining sector has performed especially seeing that gold is trading over $500 an ounce higher than it was back then."

    It might be worthwhile entertaining the possibility that the miners are fairly valued and it is gold which is overvalued.

    ReplyDelete
    Replies
    1. Unknown;

      I would say that the miners are undervalued mainly for the main reason is that many of the companies are not showing consistently improving growth prospects. Investors reward GROWTH, not stagnation.

      When it comes to gold, I would say that one would only have to look at the amounts of money that have been conjured into existence by the Western Central Banks (FED, BOE, BOJ, and the ECB) since 2010 and thus I believe gold is not overvalued in relation to those shares.

      Consider also that the hedge funds and other large speculative interests now have a venue that allows them to play leveraged gold without having the risks inherent to selecting individual mining shares. By this I am refering to the Gold ETF's, most notably GLD. Remember, that without the futures markets, most big speculative funds were at one time prohibited by their charter from investing in futures. They could however buy gold mining shares. That allowed them to obtain leveraged exposure to gold (gold in the ground) and thus served their purpose without have to play at the Comex. The gold ETF, now allows them to play that vehicle on margin and thus get the same leverage that the shares once provided without needing to be gold share analysts. Those who conjured the gold ETF into existence, dealt a crippling blow to the shares in my view because they have created a vechicle that siphons of huge amounts of investment dollars that otherwise would have found their way into the shares.

      Delete
    2. The ETF's giveth, and the ETF's taketh away.

      Delete
  3. Yes Unknown, "paper gold" along with most every other dollar denominated asset probably is overvalued. Physical gold will at some point be traded as a wealth reserve. Only then will it be "fairly valued."

    ReplyDelete
  4. On mining shares.

    Take a look at the gold/oil ratio. First gold/Brent since 2002

    http://pbs.twimg.com/media/BBZ3Jj1CcAAiCEo.gif:large

    and then gold/oil (annual averages) since 1946

    http://pbs.twimg.com/media/BBZ2155CMAAkvLo.gif:large

    It is quite obvious that this ratio has been fixed at 15 since mid 2009. What's also remarkable is that it has been range bound between 10 and 25 for more than 65 years now.

    Of course, you should ask "Why?" But if we are just pragmatic for a minute, we see that the gold/oil ratio already explains why the mining shares aren't getting anywhere. Diesel fuel is typically their largest expenditure. So if gold/oil is kept constant, it will be difficult for them to benefit from a higher gold price.

    At a more philosophical level, you can ask what's the business of a mining company. Is it to "produce gold"? No, I don't think so. It is rather their business to dig something out of the ground for a fee. They hold a concession (issued by some government) for this purpose. Sure, the government will pay them a reasonable fee per ounce for this service. But why would any government give a mining company an arbitrary upside when it is the country/people/government who really owns the in-ground gold? Doesn't make sense and therefore won't happen.

    The rule that the mining company is allowed to dig it out and then sell it at market as if they had owned the gold, is just a temporary arrangement which makes some sense because, in effect, it provides the mining company with a roughly fixed compensation per ounce. Should the gold price ever rise substantially faster than the price of oil, what do you think will happen?
    1) the mining company will be allowed to earn an obscene fee per ounce
    2) the arrangement will be adjusted such as to keep the per-ounce fee for digging constant.

    Victor

    ReplyDelete
  5. Hi Dan,

    Agree with you once more.
    Technically on a daily basis, the charts are very accurate.
    Range now between the 38% and 62% fibo of last upward movement.
    I see only one last upward support for the bulls, and it is the MLH inf of the green andrews fork, right on friday's closing prices.
    Below, it's horizontal or downward supports mainly :(

    Sinclair is right about the end game, of course, but how down shall we go in the short term?
    That is the question, and one should not get into the game if one can't hold the short term pain.
    My advice to gold long term bulls : sit tight and consider that in the worst case scenario, gold prices may briefly drop down to 1200 $. Watch this scenario in the eyes, don't buy with too much leverage, buy only what you are ready to invest with a risk of gold dropping to 1200 $, and then stick with it.
    Because if you don't, then you'll sell lower eventually and lose money instead of saving it, to the profit of the bullion banks.
    Same is you short this market, you take the risk of a systemic event, any event, with gold rocketing up before you can blink your eye, and you'll have lost the opportunity.
    Long gold bulls who buy too much too fast are dead meat, as they panick and sell with prices going down.
    Long gold bulls too optimistic who don't understand that markets are being manipulated in the short term are dead meat, because they can't understand the counter intuitive downward moves in gold, and they probably put some stop loss too close, which will eventually be activated and result into a loss.
    You want to sell on these markets? Do it after an upward move when you see a resistance not giving way (like 1800 and now 1695 last days) with a buy stop just above the resistance, and hope to buy back at lower prices. At least the risk reward ratio will compensate the risk you take with this strategy.
    Eventually, I'm certain prices will go up and beyond 2000 $.
    Sinclair is not a prophet : but he perfectly pinpointed the obvious.
    Keep the faith in the long-term, but remember : gold may drop more than you expect on the short term. Be prepared and hold the charge, and take your long positions with the conviction that it's long term and you won't sell them before 1200 $. If you don't, you are dead meat.
    Kind regards,

    http://www.monsterup.com/image.php?url=upload/1359203796262.jpg

    ReplyDelete
    Replies
    1. Hubert;

      When it comes to anything "gold" I am of the opinion that it is best to hold a core position but also a position in which you trade in and out of using the resistance and support levels and other various technical indicators to aid in timing the ebbs and flows.

      Buy and hold does not work in gold. The key is that positions have to be monitored every single day because of the condition of the economy and the implications of all the massive liquidity injections having taken place by Central Banks around the globe.

      When resistance levels fail; you sell the tradeable part of your holdings. When support levels hold, you can buy them back with tight stop loss orders to limit any sizeable losses. the idea is still to buy low and sell high. The key is never to buy so as to try catching a falling knife. The reason - you never know how much farther the knife will drop and will end up getting slashed. Use the technical price charts to enter after it appears that the selling pressure is drying up.

      On the platinum/palladium front - the platinum group metals are responding to legitimate supply shortage fears. Those fears are pushing money back into metals which traders believe will benefit from a pick up in demand due to improving economic growth. the idea is if growth increases, more cars will be sold and thus more of that metal group needed for exhaust systems.

      Copper is in my view the best metal to watch however in order to gauge the overall sentiment towards global growth prospects. It is usually a pretty good bellwether.

      Delete
    2. Thanks a lot, Dan,
      I agree 100% : my comments were referring to, and only to the long-term core position.
      The dynamic trading lines, oriented short-term, are another story.
      I simply wanted to stress on what you wrote for the long term bulls with core positions : "you never know how much farther the knife will drop and will end up getting slashed."
      I'm afraid for many long-term bulls who bought too much on their core position and won't stand the heat if we take another blow under 1600 $.
      For core positions can be sold very easily now if it was bought through BV, GM and the like. Commission rates and internet orders allow it.

      Thanks for the saturday's summary, which I appreciated a lot, along with Bill Hayne's as well.

      Wishing you a nice weekend,

      Delete
  6. P.S : about manipulation, please Dan, can you watch the friday prices between 09:00 and 13:00 (N.Y times) for :

    - Platinum and Palladium (up big time)
    - Gold and Siver (donw big time)

    Isn't it the most blatant proof that someone is pushing gold's prices down?
    Thanks to Yannick Colleu who showed me those charts.

    ReplyDelete
  7. I some articles that talk about the "all in cost" or true cost to mine an ounce of gold is somewhere in the range of 1,200 to 1,400 an ounce. This factors in the cost of taxes and the money that needs to go to replace depleted reserves so production can be maintained. This might explain why the mining companies are priced the way that they are.

    http://seekingalpha.com/instablog/839735-katchum/1396661-the-marginal-cost-of-gold-silver-production-2012

    ReplyDelete
  8. Hi Dan -
    Let's just face it, there's a double standard when it comes to stocks propped up by the PPT and the rest of investing universe:
    BA (as I mentioned before) has its fleet grounded for a problem that still hasn't been identified! and trades flat. Moreover, BA made less money in 2012 than it did in 2007 (FCF 7.8 vs 4.4) and is trading roughly the same.

    CAT spent 1/2BILLION dollars on a FAKE company, had FCF go from 4.8 billion in 2007 to -194mil TTM and is trading 40% higher than it did on 1/1/2008.

    GG has FCF that gone from -205mil to over a billion TTM and is trading down 5% since 1/1/2008.

    ReplyDelete
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    ReplyDelete

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