"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

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Wednesday, February 20, 2013

HUI has "Issues"

The mining shares still continue to sink lower seemingly unable to attract sufficient buying to stem the flow of red ink being seen across the sector. As a fundamentalist, I think one can make the argument that some of the leading shares in the sector are severely undervalued against the price of gold; however, as a technician, one has to respect the chart action be that as it may.

I am presenting a monthly chart but wish to note that the last trading day for February has yet to arrive so there remains sufficient time for the index to recover. It is however flirting with some important chart support level. I thought that the index might have found enough buying near 380 to bottom it. That is evidently not the case.

What concerns me with this chart, and again, the month is not yet out, is the fact that the NEGATIVE DIRECTIONAL INDICATOR is at its highest level since the move lower in the middle of the credit crisis of 2008. The bottom of that move lower in the index was accompanied by the peak in the negative DMI near the 30 level. This -DMI is currently sitting at -26.53. I have noted this level on the chart with a dashed red line.

One might make the argument based on this alone that the shares have now reached oversold levels commensurate with a bottom. That might be true but as of right now, we do not have any technical confirmation of such; we only have an extreme oversold reading based only on this particular indicator. You will notice the lack of any white candle whatsover. In other words, there is no buying in size sufficient to absorb the continued selling occuring in the sector. There is buying just not enough of it.

Here is the problem, the ADX, the solid navy blue line, is rising even as the -DMI is rising while it is above the +DMI (the blue line). That only happened very briefly back in 2008. Keep in mind that a rising ADX indicates the beginning of a trend but generally it needs to get above  the 20 level to be valididated.

BAck in 2008 as it began to turn higher while above the 20 level, the Fed announced the inception of QE1 and that put an abrupt end to the slide in the gold shares, as well as everything else on the planet it seems. Now, we are witnessing the rising of the ADX (it is still below 20) with chatter that the Fed will end the QE sooner than expected. I personally do not believe that they can but what i believe is of no consequence when it comes to what the majority of hedge funds/large investors believe.

While not a particular fan of Head and SHoulder patterns for predictive purposes (those patterns are highly overrated), it should be noted that the index is sitting right on the neckline. A breach on a montly closing basis would get the bearish chatter going even more against this sector but traders need to pay attention regardless.

There is a band of congestion near 320 - 310 that should attract enough buying to at least drop the index into a congestion pattern at a bare minimum should price get there. Let's hope it does not for the sake of those long suffering gold share bulls.

One last thing, you will notice that the HUI tends to make SPIKE BOTTOMS when it finally does exhaust the selling pressure. If it can do this before the end of this month and recapture the 400 level in the process, it should be a fairly reliable signal that the worst is over. We simply have to wait and see.



  1. Hi Dan - We must be getting close to 2008 spike HUI:GOLD low, no?

    As always, thanks for the dispassionate discourse.

  2. The miners have had annual cost increases of 11% or so. The margins get crushed even if gold/silver are steady, but if they are hammered down, the miners have no chance.

    What must happen is Au/Ag beginning to rise.

  3. Dear Dan,

    about the FOMC statement, I fould a parallel episode in the 1930s :
    "By November of 1933, a frustrated central bank brought quantitative easing to a complete halt. How did the US government respond to that?
    The answer is that just two months later, on January 30, 1934, it passed the Gold Reserve Act. The US government revalued gold about 70% higher, and then continued purchasing it aggressively at that price, using printed money."

    Do you think it is likely to happen again nowadays?

  4. Haven't commented on here for a bit, thought I'd spare a few thoughts. Gold has seen sharp sell-offs in the past week or two, and I've been checking sentiment through twitter. A lot of people got pulled into Gold back in September 2011, at the peak in the market. However, they now find the Gold price is 17% lower than when they bought and they are holding onto their Gold and not wanting to buy anymore, unless the price rises sharply.

    Late last week saw Citigroup claiming that Gold and Silver prices may have just started a bear market which could last as long as the last bear market. If that's the case, Gold prices could halve to about $800/£550 and not claim new all time highs until the early 2030s. Is it totally inconceivable that this could happen?

    1. If $800 happened, virtually all the gold companies would have to shut down. It would economically devastate the entire precious metals sector. Supply of NEW gold would almost dry up. There would still be the entire history of already mined gold but it would not be easy to get it without higher prices. They could always make gold illegal on a global scale to curtail demand but that is another issue.

      To mine gold costs an average of ~$800 plus there is an additional 20% operational cost for each ounce. The very deep underground mines couldn't operate. Only the very high quality gold or very low cost could be mined so most gold mining curtailed.

      Whoever said that price is trying to keep the less sophisticated people in fear. Absolutely lowest gold price the powers that be could allow is one that keeps Barrick profitable enough and in business. The last line in the sand sometimes back was $1200. I'd estimate their lowest point in the sand at the moment is 1300s. At that price, many reserves would turn to just deposits.

    2. 20% ... is usually $200 or $300

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