"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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Monday, April 15, 2013

Watching the HUI for Signs of a Respite to the Selling

The gold shares have been remarkably prescient when it has come to predicting the slide in the price of gold. We have mentioned that the ratio of the HUI/Gold was so skewed that something had to give, either the price of gold was going to have to drop further and at a faster clip than the HUI was falling or the HUI was going to have to start to rise to bring this ratio back into balance.

Seeing that the shares have led the price of gold lower, I think it just makes sense to look for a sign of a selling exhaustion in there first before the metal itself will bottom.

In looking at the following long term chart of the HUI, the technical damage is all too painfully evident if you are a holder of the mining shares. I think it was last week that I put up a chart of this and noted that since the bottom tine of the pitchfork had been violated, that the next technical level of support would not emerge until down near the 275 level. We are there now. Notice that using two different sets of points from which to sketch out the Fibonacci retracement levels, we have a confluence near the 75% retracement level of both sets of numbers. I have circled that with an ellipse on the chart.

As you can see, that is between 273 - 272. That is very near the low made so far in the session which is 272.60. Here is what to think of this. If this level does not hold the decline, and I think it will have held if the HUI can close today's session above 290, (The session is not over as I type these comments) then based on Fibonacci retracement theory, we are going down even further. There is another band of support down near 250 should we fail here.

I also want to make a point very clear here. Just because a market may bottom, does not mean that the bull market is now ready to resume. It is not. The chart damage and more importantly, the psychological and financial carnage inflected on gold bulls has been so severe, that it is going to take a massive sea change in sentiment towards this metal before the gold bull market will resume. In short, their confidence towards the metal has been dealt a massive injury and that is going to take time to heal.

Right now, the sentiment will be to sell rallies until the chart technical aspects improve. What will it take to do that? Answer - loss of confidence in the respective currencies of these various nations that have embarked on their large scale quantitative easing/ bond buying programs. Remember, this is still to all practical reasons, a zero interest rate environment. Yield is still the key. Since gold throws off no yield, and since investors have as of yet to lose confidence in these fiat currencies, there is not much incentive to own the metal. Something has to transpire to shake the complacency.

What will cause investors to lose confidence in their currencies, is the onset of inflationary pressures. With the entire commodity complex currently falling apart, it is difficult to see where that is going to come from in the very near future.

I would want to see wages rising, which as of yet there are no signs of, before getting to a different mind set towards inflation. Heck, the US jobs machine is broken with the number of jobs being created no where near what is necessary to spark a solid recovery. Right now, we are back in the deflationary mindset with the only thing preventing a larger share of investors to coming around to that view being the soaring stock markets around the planet. We may have finally now seen the first real chink in the equity bulls' armor however. Finally, the S&P 500 is responding in kind to the severe sell off in tangibles and to the various warning signals that have been popping up in the Russell 2000 and the Dow Transports. STill, even with all this carnage in the commodity sector, there remains an incredibly obtuse attitude towards these warning signals on the part of the "buy every dip in the stock market" crowd.

There is a real tendency among traders, (among human beings in general I might add) to not recognize a change in the dynamics of a situation. In other words, we tend to rely on what has always worked in the past and assume that will be the permanent order of things. Anything that deviates from that which we are familiar with then is looked at as if it is an aberration, something that is momentary and will pass before the familiar status quo reasserts itself. This is why inflection points in markets can be so difficult to ascertain. We ask ourselves, is this a change in the trend, or is this just another ongoing reaction in a bull market. The equity guys, for the most part, have not bothered to even ask themselves this question. They almost robotically and mindlessly I might add, continue to buy the dips in price expecting ever higher and higher prices in stocks while all that is transpiring around them should urge any of them with a bit of sense to exercise some caution and not be so damned dogmatic.

As I stated in a previous post, there is not a single human being on the planet who has ever lived through anything remotely resembling what is currently occurring in the financial realm right now. We are all sailing without a compass in that sense. How in the world can we know with any certainty where in the heck things are going to go right now? We are just making guesses, informed guesses based on experience and history, but they are guesses nonetheless.

In that regards, the behavior of the overall speculative crowd is what will help us navigate these waters. Herd instinct or herd behavior is difficult to predict but once it manifests itself, it is not too difficult to read. When the attitude of the herd towards equities changes, when they are reluctant to chase prices higher, when they begin to grow nervous over holding stocks, when the formerly confident dip buyers begin to second guess themselves, then we can note that when it occurs.

Keep in mind this one word - CONFIDENCE. When that goes, so too will everything else. That is the number one task now of these monetary elites and Central Banks - do nothing, say nothing, infer nothing that might rattle confidence.

Take a look at this chart of the Russell 2000. These small cap stocks have been a much better indicator of investor willingness to take on risk. One would have thought that with Qe3 and QE4, now combined with the near equivalent of the Bank of Japan's version of QE, that small cap stocks would be on a tear higher. They are not and that should pique the attention of investors. Here is a market that has now had THREE KNOCKS on a solid resistance level and has failed to better it. Not only that, it is back below the 50 day moving average. If the support level on this chart gives way, and I do not know if it will, then I would expect to see some more rattling of the confidence cage of these equity perma bulls.


  1. It is like being in a submarine watching as the commodity markets blow up, everyone in media cheering, until ....they look up and figure out who is next up getting the torpedo.
    If Deflation still exists as we know it does in the labor markets as well as in the commodity markets, when will reality set in the STOCK MARKET?

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  3. Dan,

    Appreciate your very measured insights. One question about paper vs. physical gold. I am not very clear on what this actually means. On the paper side I own PHYS. When people talk about the "end" of paper gold, what does that mean if it were to happen? What could happen to my PHYS, or someone's CEF or GTU or SLV and GLD for that matter?

  4. Cortopassi,
    I can hear the headlines now. They will read something like this:
    Upon perceived excessive demand (people should not be wanting their physical metal from contrived valueless ETF's anyhow)GLD is closing and the final CASH payouts will be determined by COMEX closing price of gold,silver (When it gets low enough to pay you pittance on your gains)when and if it finally crashes. Naturally if you sold gold in physical it will demand a 100% markup on the prices you will get. The ABN will be pulled settling cash after the crash.

  5. I guess the first torpedo hit the markets. Started to really believe that they thought that their elixir and magic potions fed all stock believers that the stock market would hold while all of civilization melts down. Well maybe, just maybe we are witness to a sister trend started in 2008. I figure now the stock market rolls over pretty hard and the HUI and Metals will come out first. May take awhile now that the Banks pushed our heads underwater and held them too long (Still trying to get air here). When we come up for air that will mark the begininng of the end for existing capital markets structure.
    A New World (O)trading and settling currency system will have arrived. Let's see how long the stocks can go underwater prior to the new system getting announced with subterfuge.

  6. I'm just wondering how deep this thing can go.
    Don't forget you have an army of bears on the other side, making fortunes right now on the back of the routed bulls.
    Or not routed yet?
    I don't know, it doesn't smell like capitulation because the lows would have been met very shortly, and now we stay and stay more in this 1350 $ area... :( which would mean that further down movement is possible.
    I Wonder how many longs will be destroyed before this crazy bull grinding machine stops.
    Maybe the exertion of the day but I re-sold my small long of 1360 at 1360 as well : doesn't bounce, and silver is now Under 23 $. I'll just check without betting on a day like this.

  7. Hi Dan,
    Could the happenings of the last week be to force money out of the physical gold and into the markets? Maybe the HUI will benefit as well as the markets in general.

  8. Mark. You have to have a Bernanke pulling up the stock market with his "belt and suspenders" magic. I need to hear how he will keep the dollar afloat while the major trading regions keep making cross currency deals and almost ALL market(s) and economic signs all point south. What possible "statements" or magic elixir can he conjure up to avoid another stock market spillover? Inflation in check, employment numbers rigged, crap the stock market is getting low, someone grab the hot air microphone we just lost over on the Dow

  9. Thanks for comments. Boy, I never thought that stocks that had gotten so beaten up, could be even more beaten up !


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