"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, April 24, 2013

HUI Showing some Signs of Stability

The mining shares are attracting value-based buying which is providing some signs of stability in this beaten-down sector. As mentioned many times on this site, it will require far more than value-based buying to take this sector strongly higher. For that to occur, it requires momentum based traders.

Just take a look at the broader equity markets and you can see what happens when these momentum buyers decide to chase prices higher.

While we might have stem the downside in the mining shares, this sector needs to prove itself technically in order to give some potential buyers the confidence that this is just not a pause before a new leg lower.

For that to occur, buyers will have to show enough conviction to take the index into the gap region shown on the price chart. They will not only need to spike it into that gap, but hold it there on a close for a bare minimum. If they can do that, it should give some bears second thoughts about hanging around excessively long and overstaying some successful trades in the mining sector.

A CLOSE above the top of the gap, near the 300 level, should bring in some momentum based buyers as it will induce some additional short covering.

I want to continue to reiterate the necessity of these mining shares to improve their technical chart pattern before the gold market can sustain any sort of extended move higher. The shares led the metal lower and more than likely they will lead the turn in the metal higher. I would also suggest monitoring holdings in the ETF, GLD, to see if investors are returning to gold.

Moving over to gold itself, I am detailing a 2 hour chart as it establishes some areas of technical interest for us. After the wild volatility of last week, we are finally seeing some signs of a market that is settling down and beginning to act in a more "civilized" fashion. By that I mean it is not swinging all over the place.

Along that line, the Gold Volatility Index, has been dropping also. It is currently trading near 21.80 after having spiked as high as 35. That confirms that the recent bout of volatility (emotional duress) is behind us for the time being.

Back to the chart - what concerns me about gold is that the strong physical demand has been able to spook some bears (Goldman cancelled its sell recommendation) but has not yet been enough to bring back those investment types that were flooding into the gold ETFs around the world and the mining shares.

The other question I have is whether or not this physical demand is going to keep up its torrid pace if prices continue to drift higher. Gold under $1400 was certainly cheap but will buyers around the globe see it that way if it climbs back towards $1470 or higher? That remains unclear.

What I believe is the more likely outcome of this is that a floor has been established in the gold market below $1390 but there is not enough investor type demand from large players to drive the market sharply higher. The outcome then is most likely a period of range bound trading with both sides looking to either sell rallies or buy dips depending on their bias towards the market.

Right now, the top of the range is near $1440. Selling is entering near this level and bullish enthusiasm is fading as the market moves higher based on the shrinking volume. With volume low, bears feel confident selling against this level since they have some wiggle room to play with the $1450 psychological level as a mental stop out point. That is a relatively favorable trade in their minds since the risk is small compared to the potential for a drift back towards $1400 and perhaps lower.

Bulls on the other hand will more than likely feel comfortable buying in near those same levels figuring that physical demand will be their ally. They do need to take the price through $1440 very soon or they are going to face some desertion in their army from the shorter term oriented day traders and scalpers.

As far as today goes, the strong pop in crude oil that has taken it above the $90 mark, along with a bit of strength across the commodity sector, most notably copper, is giving gold a boost, especially with a bit of weakness being seen in the US Dollar.

It is going to be very interesting to see if the Asian demand that we have been seeing overnight continues this evening. It cannot let up if the market is going to hold its gains especially with equities continuing their one way trip north. Blue Horseshoe apparently still loves equities and until he stops loving them, a great deal of that $85 billion from the Fed this and every month, along with that $74 - $76 billion from the Bank of Japan, is going to end up in equities instead of gold.


  1. Hi Dan, thanks for your blog!
    First regarding "I would also suggest monitoring holdings in the ETF, GLD, to see if investors are returning to gold".

    As far as I know, SPDR Gold Trust (GLD) do not buy gold just because some investor buy a share, and it does not sell gold just because some investor sell a share. It is just a "pool" of gold. I.e it is not actively "managed" by the trust to track the price of gold. It is supposed to track gold because of the arbitrage that would arise when it doesn't. If GLD inventory is falling, it is because an AP is redeeming actual pyshical gold from the trust (exept possibly selling to pay for internal expenses of the fund) on behalf of themself or some investor with a basket, 100,000 shares.

    That is how I think it works...am I wrong?

    If so, how can one see difference between the following examples (examples only, other possibilities exists as well):
    a) liquidation of GLD: investors don't want to own gold at all - who is then buying the pysical gold that is redeemed from the trust by the AP?
    b) liquidation of GLD: investors want to own gold, but not in the SPDR trust.
    c) some entities have problem deliver physical gold, they borrow GLD-shares, using these shares to redeem physical gold (conspiracy: and then smashing price to cover the short GLD position. :-)
    My point/question is, are you saying that falling GLD inventories is 100% sure it is investors don't like gold anymore and just liquidating their long positions. Then, why do SLV not show the same pattern?

    Thank you again for your blog!

  2. Gold around 1470 will be an interesting observation. My guess is it will continue lower for the near term.

  3. hey dan....interesting day....gold shares were doing well, not as good as yesterday even though gold was up much more... but despite gold staying high, the mining shares gave up most of their gains towards the end. i dont really get it..was it cos the whole market dropped cos of the negative german news...my worry is this...if the the shares are tied so much to the general market, what happens to gold and the shares for that matter, when the stock market starts to drop which seems inevitable at this point...will gold rally/drop..will the gold shares rally/drop? or will the gold market seperate...? thats my question really...are the gold shares held hostage to the general stock market?

    1. Most of the damage has been done in the gold market. I don't see any drops to below 1200 remaining for long. I just want to be in a position to buy if some better discounts comes along in the higher quality shares.

    2. yeah thats what im hoping...but if theres a market crash and gold market doesnt go down, wont it therefore go up? that would be well sweet...but todays ending was a little dissapointing since the day before gold moved about 10 bucks and the GDX was up like 6 percent whilst today it was up like 2 percent despite gold being up about 40 bucks...i just want that little bit of extra stability/confirmation being jumping into a leveradged gold shares index like NUGT which did 20 percent yday and about 5 today....

    3. it won't go up immediately. there will be liquidity problems that need to resolve itself.

      until gold goes above 1520, i just assume at some point it will go down to around 1100-1200. I hope I have cash available to buy some of better quality stuff when or if it happens.

  4. There's so much going on in the news I haven't even had time to study the precious metals much. Dan do you think this is a "dead cat bounce?"

    The News UNIT

  5. Seems pretty clear to me that the mining shares are being shorted against long positions in physical gold. Bullish interest in the shares is so tentative that traders are confident the shares can be held flat as gold rises and will tumble of their own accord if gold weakens. Not sure where this bet will be called, but if physical holds $1477 going into weekend, I wouldn't want to be short the shares Sunday night.

  6. Just as I posted, gold got slammed $15 in a single tick, down to $1461. Looks like the end game to me. Slam physical, send the shares tumbling, cover shorts going into the weekend. I'm a buyer of shares this PM.

    1. Robert.
      Yes, the game that was suspended until they nuked gold, now continues again. At some point I would think there will indeed be the explosion in Mining shares. It is such a long brutal war.
      However, bullion cleared Dans 1450, almost took out 1470 and I was about to crow last nite when it appeared 1480 was too being breached, so I would think if it maintains the 1450 as a weekly close, it becomes support. The short miners club long bullion, is playing with fire so they better learn a new trick if we set off Monday 1450 and clear 1480 for the week. We will then get the 300HUI and it may get explosive..come on 1450 Hold.

  7. Dan,
    What are the Traders thinking about the JPM vault. Any fear of default and cash settlement?

  8. White Wolf,

    I concur...if we can hold 1450, or better yet, 1460, next week will probably see HUI go to 300 since the 270 ish area seems cleared...i feel like the 30 dollar gold slam was slightly healthy too cos gold went up too quickly it seemed... i still think the mining shares will go up more than they have gone downn overall. good luck


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