“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"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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Friday, October 4, 2013

Mining Shares Continue Weak

While I would dearly love to be able to provide some bullish news for those who favor gold, unfortunately I cannot. The charts are simply not showing any reason to refute the bearish case.

Consider in particular the HUI, or index of mining shares. I have deliberately included a weekly chart to provide a longer term perspective.



Notice the second indicator which is a proprietary one that I employ - it is basically a trending indicator. What is really striking is just how bearish the price action in this sector has been for the last two years. As you can see, this indicator only flipped positive for a mere 12 weeks out of the entire period since October 2011. In other words, 12 weeks out of 104 week total. That is just horrendous!

What is most discouraging is the indicator has resumed moving lower once again as it is now down for the last 5 weeks in a row. For a brief moment, it appeared that it was going to make an effort to cross above the "0" line and become positive but hopes for that faded at the end of August.

About the only thing I can say the least bit positive about this particular indicator right now is that it has the "possibility" of setting up a bullish divergence if the HUI moves down to the previous low made in late June but even at that, it would only confirm the existence of a friendly divergence, but not necessarily an actual buy signal.



Below that indicator is the Directional Movement Indicator, another trend following tool. Note that the Red Line or Negative Directional Movement has been above the Blue Line, or Positive Directional Movement for most of the last two year period. It is currently far above that blue line even now. In other words, though the solid ADX line is moving lower indicating that the downtrend has been broken or suspended which is perhaps a better way of saying things, the bias is still to the DOWNSIDE unless or until proven otherwise.

When you look at the 50 week moving average which is over 100 points ABOVE the current price and headed lower, it is impossible to make any sort of bullish argument for this sector.

One can argue that the gold shares might be attractive from a "Value" buying perspective but the problem with that is that many expect them to fall even further yet and are certainly in no hurry to buy. Maybe in 2014... who knows at this point....

Like I said, it is very difficult to find any bullish consolation in the entire sector. What has me concerned is this bearish price action in the shares is suggesting that the worst is not over for the actual gold price. We will see how predictive these things are, one way or the other.

32 comments:

  1. Another interesting point.
    I know you explained why this happens Dan, but, the DOW is up going into a weekend when there are major issues of uncertainty in Washington.
    You would think that traders and hedge funds would want to be flat under such circumstances.
    This is what you would call a very very strong uptrend (super Bull) coupled with a lot of complacency (and faith in the FED PPT)

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  2. Congress has the problem to solve of preserving the three equalities of money. That is to say: First, full value; second, international acceptance or world-recognized value; and third, stable values, not fluctuating value. In the case of the insurance companies, their policies represent the cost of the people who have, at the sacrifice of the present, accumulated wealth for the future. That wealth belongs to the people, and we cannot settle the problems arising from the mismanagement of the world-money system by passing the consequences of mismanagement on to those who have saved. It does not meet the problem to pass the losses of mismangement from one class to another class. So I propose that we take hold of gold and manage it. There is the answer.

    --Mr. John Janney, during his testimony before Congress during debates on The Gold Reserve Act of 1934

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  3. Dan,
    It has been absolutely BRUTAL on this sector. I am surprised these JR's have made it this long. Lets see how much longer they get held over the fire roasting until some CONSOLIDATION starts just rocketing these companies into one big Gold Mfg company directed by some Hedge Fund and some deep pocketed Banks.

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  4. Dan, another good Friday afternoon wrap-up of the ongoing bear mkts in the pm's; maybe a lot of dyed in the wool bulls should pay attention to what Mark Twain said about gold mines and miners, huh? have a good wknd everyone, swb

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  5. Very good article, and very true.

    It really is heartbreaking to see what has happened in the PM sector. To think about that silver is down almost 60% from its high. That's obliteration.

    The long-term damage to the mining shares has been incalculable. The steady rise in gold and its drastic fall has left the miners bereft. The more investors look at the miners the more they realize their balance sheets and capital structures have been too far damaged. How many more write-offs? How will the debt load be graded? It will take years to repair, and shareholders will continue to flee, to much better sectors. I see no compelling reason to buy them. Not even for value. What is their fair price anymore? Will bankruptcy judges determine that? They are too damaged to respond well to any rise in the price of gold. And as prices ebb, so will any hope of recovery.

    The worst part is that the shares are telegraphing gold’s future price direction. Please look at it accordingly. Invest in this sector as a way to shield assets, nothing more. And please hedge holdings.

    This is telling me that gold is going down to depths that will make unhedged holders sick. If this is the best gold can do, during its best time of the year, and with all this theater in DC going on, I say wait until November or December. We are going to see a resumption of a collapse. The bullion banks were dumping at 1320 all week. I am afraid we will look back at gold with a 13-handle with fondness. The price action is just miserable. Not one price rise can be maintained. All week, every move to 1320 was firmly rejected. I mean rejected with vengeance.

    The only reason why we didn’t see gold drop below 1300 yet again is that the bullion banks still have long contracts, because of the season. Once that is gone, there will be no floor.

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    1. very clear and well thought out thinking; I too do not think the lows are in; swb in sparks

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  6. Gold will not fall to $1,000, unless it is very brief, and/or currency is valued MUCH HIGHER... meaning $10 will buy you a yacht!

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    1. We'll find out whether we see a sub-1,000 comex print within 12-18 months...

      As for the $10 yacht, most will be too indebted to afford that.

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  7. That was not a fact, just a hyperbole...

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  8. "The restoration of an international metallic standard would, therefore, seem to require two things. One is the breaking of what has been called the corner in gold, that is to say, a deliberate reduction of the value of gold so that those who have cornered it and hoarded it will wish to sell it and so get it distributed. The other is the establishment of a method of holding the lowered value of gold steady so that nations returning to gold will not thereafter be subjected to violent deflations or violent inflations."

    -- Walter Lippman, Jan 16, 1934

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  9. To answer to Dean and Eph on last post, I think Eph is right, if you have the possibility to hedge or dynamically protect some of your long position.
    For those who bought a moderate quantity of physical for insurance via buying coins, with the commissions liked to sales and buying plus the taxes when you sell them back like in France, I would not watch prices every day as there is nothing I can do about it.
    For all other cases, Eph is right.
    Another trader mentionned capping 1350 and it happened.
    Now it's been 2 days they seem to maintain a cap above 1320.
    So I would consider this :

    - gold may still break the recent june lows and head towards 1000 $. In my worst nightmare scenario, I consider 850 $, around the MACD 9 20 7 of the quarterly time unit.
    - if you think you will feel desperate and sell in a panic some of your position if we reach 850, or even 1000, or actually even if we break 1180, I'd suggest you do it now! Not all of it, of course, but maybe one third or one half. In addition, be ready to buy stop your position if gold prices break through 1350 $ (or 1330 to play the 1320 $ last resistance). You take the risk here of paying quickly a premium of 30 $ on that position if we see some scissors in the price action, but at least you protect yourself now from a big move down coming soon if the bears are indeed taking control again. So maybe it is worth the try once.
    - Another way to protect yourself, but I guess most readers won't have that possibility, is to buy some puts on gold, "out of the money" (it's the technical term, meaning target is far from current prices). The cost of those puts will be cheap, with a big leverage if we see a large move down soon. So if you are wrongm you only lose the cost of the put, but if you are right, the big leverage creates gains which compensate your loss on your long position.

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  10. "...the reason I advocated cutting the gold dollar was, for some reason, the gold dollar had been going higher and higher and higher while property values were going lower and lower and lower, measured in gold. The States and the municipalities and the Federal Government were so loaded with bonded indebtedness, our people generally were so loaded with mortgage indebtedness on property, that I did not believe they could ever discharge those debts in gold dollars of the old content under present economic conditions and according to present price levels."--- US Senator in 1934

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  11. Nice post Dan, thanks. I wonder when miners will start slowing/stopping production...there must be some worried mining CEOs out there that are hemorrhaging money. Anyone know/recommend any leverage gold mining ETFs? When gold starts to rebound, hope to get some of my pennies back!

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  12. Chart : 2day candle charts.

    http://i42.tinypic.com/sqrzpk.jpg

    You can see the Head and Shoulders I was mentioning recently.
    Fortunately, the range in the Bollinger Bands allowed a bounce.
    But it seems (Eph) that 1320 is now being the line in the sand for the bears.
    Bulls seem UNABLE to fight for a resistance and go through it.
    1350.
    Now 1320.
    Next?
    I just see no strength at the moment. Only supports temporarily helping prices to bounce before they give way.
    So, the theoretical target for this H&S is once more around 1180.
    We are still above its neckline (lower blue dotted line), but beware if we attack 1290 one more time. Especially now that the Bollinger Inf is starting to give way to the downside...we may quickly reach 1250 where the black channel's support may organize some bounce, maybe again towards 1290 before collapsing back to 1230-1220, the area of the weekly Bol Inf.
    As usual, it's not a forecast, rather a scenario that I'm following in order to be ready to act if it happens.
    A new attack of 1290 has greater odds now to break 1280 and send prices to 1250. Like Dan said, except from the possible future divergence, I don't see much hope in gold prices either on the short term. We'll see. We are still above 1300 $, maybe I'll have a good surprise :)

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    3. I agree, Hubert. That's just what I got. I showed my head and shoulder s here:

      http://1000gold.blogspot.co.uk/2013/10/head-and-shoulders-in-gold-and-gold-at.html

      The charts of gold, the GDX, GDXJ, HUI and XAU all look like they may have head and shoulders patterns to me.

      However, I really like the Point & Figure chart of gold that is on that page and linked to Stockcharts.com Gallery View.

      Reaching $1340 would interrupt the red line and $1350 would be through it. Gold is right at resistance and has been for 6 weeks since the late August high at $1434. Not a hair's breadth of latitude has been given to bulls. However, it is still at or near resistance so something is in the balance. While gold is still below this line, price is pretty much guaranteed to drop at the rate since last September at an average rate of $9 per week or at the more recent rate of $13 per week, the slope given by a pitchfork drawn using the April crash high and low and touching the 28 June low at the bottom. The April and June lows were 11 weeks apart and $140 apart, giving the $13/week slope which is still in play in this current correction. Bears are still in charge.

      It all looks fairly awful but on that link is the basic point and figure chart courtesy of stockcharts.com Gallery view. It shows the down sloping red line of hard resistance going way back to last September's $1800 high, with the X being put in on 08 October 2013 to take the price again exactly to the red line where it has been repelled yet again, as on many occasions since the $1434 high in late August 2013.

      Also, I have noticed that on Stockcharts.com Gallery View, the target for the pattern in the US dollar index (ticker $USD) has very recently switched from 102.0 (not achieved) to 75.0

      (I corrected my awful typing and deleted the previous replies.)

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  13. I am confused. Let me list some seeming contradictions in what has been said about the pm and miner and other markets.

    HUI goes way down because gold ETFs replace the demand for gold exposure. But when gold and ETFs are dumped, HUI goes more down. If the ratio of gold to HUI is far higher because of ETF demand, why wouldn't the gold to HUI ratio narrow as price of gold goes down?

    Cost of production is somewhere around $1200 in US Dollars? Wasn't the cost of production down near $300 as recently as 2007 (I really cannot remember a figure, but gold was down there, so the cost must not have been much higher than the price of gold??) Is the price of Oil really the only factor driving cost of gold production so high?

    If Oil price causes cost of gold production to go up, then in case of war in Middle East, there will be no profitable pm mines anywhere (unless pm prices go up proportionally)???

    Dividends of miners. NEM is said (by MSN money site for example) to have a Yield of 3.71% currently. When the 10-year US treas. yield went up to 3% precious metals were sold drastically, one "reason" being that the 10-year US treas. yield was a better investment than a no-yield metal. Yet the mining companies were yielding say - was it - 3% ? But the mining shares went down more than the metals because, well, they are mining shares. (????) But, of course, there is risk in holding a mining stock ... unless of course it's PE is 10 and should do okay because the cost of gold must go up if production costs go up because the price of gold should reflect the cost of production or else there would soon be no gold to be purchased at current prices. ???

    Moreover: So why do mining shares always go down? Because they have been going down. So why do they go down? Because GLD goes up and Treas. yields go up. But when GLD goes down and Treas. yields go up, then mining shares go down even more.

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    1. Edit: In final sentence I intended to say "and Treas. yields go DOWN ...

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    2. 1. HUI:Gold sinking is correlated w/ the rise of ETFs. Another likely cause is the pair trade -- Long gold short the miners, which further distends the ratio. Why does it just always go down now? Per Eph. gold miners are for the most part in trouble--invested in high cap. projects for low grade ore that require high gold prices for break even. For the same reason that gold is valued, mining is harsh--gold is rare.

      This may be peaking in my mind, or rather getting ready for a final shakeout (assuming we are still in a secular bull market for gold)--I recently saw an article on how retail investors can do the pair trade...Also look at DUST's performance--still good, but a lot of volume and less bang for the buck relative to gold's moves. Also, a lot of people are now saying that the miners are not cheap.

      2. The information you're looking at is stale. Miners have cut or eliminated dividends. P/Es are or will be negative, cash flow harsh.

      3. Why gold can stay under cost of production? To paraphrase the Pesach Haggadah--How is this commodity different than all other commodities? It is not consumed. Gold market could exist without mining (some hyperbole). Even so commodities, other commodities can trade under cost of production for some time.

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    3. MDLGTO;

      Very well said.... excellent synopsis of what ails this sector.

      I would only further add that the inflationary sentiment, which is necessary to drive the gold price higher, is missing right now. As long as the chatter is along the lines of "the economy is improving but only gradually" or "the economy is limping along", or "upward price pressures are contained" ,etc,. it is going to be difficult to attract investment demand into the sector.

      Gold, and especially Silver, require an inflationary environment, perhaps more importantly, a fear of inflation, in order to generate the kind of buying that is necessary to drive prices higher. Look back at the 2011 peaks in both metals and you will see that those were accompanied by a near frenzy to own anything tangible. That is why I keep referring people to the Goldman Sachs Commodity Index or as I did in the past the Continuous Commodity Index. That index is stuck in the same pattern as the metals are currently. Until or unless that changes, rallies in the metals and thus in the mining shares, will be sold.

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    4. MDLGTO;
      Wow, thanks for the excellent answer to my confusion.
      Also thanks to Dan ... yet Dan's info is the small part I had understood to date.

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    5. I think it was Dan's previous post when he mentioned that inflation and deflation are currently battling it out. He's absolutely right. Prices may be rising (inflation) but the velocity of money is falling (deflationary) and people are deleveraging (deflationary). I recommend checking out John Aziz and this recent article he wrote on gold: http://azizonomics.com/2013/09/22/on-the-breakdown-in-the-correlation-between-gold-price-and-the-federal-reserves-balance-sheet/
      BTW, can't wait for a trend in gold to emerge. Either way it breaks, a lot of people will be jumping on the trade I think

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  14. Dan,
    I am only asking this because I can't remember. How much inflation was around in the period from 2004 to 2011. The Hui went crazy from 2009 to 2011. Even from August to Sept in 2012 gold stocks exploded.

    I guess inflation is what will be needed now to lift this moribund gold market. But why did it rise in what was these periods of low inflation?

    All the experts said that the gold market could not end without a mania stage. The equivalent of JP Morgan listening to the guy shining his shoes and talking to someone about the stockmarket. Perhaps for people who got convinced this mania would come (I am one) maybe it actually came in August 2011 and was a little less than mania and that is why we missed it.

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  15. Dan,
    In addition as you well know despite odd government measurements of it there is inflation that is significant in every bill we pay. Based on other indicators it gets confusing but inflation and higher costs are for the most part very much a part of our lives.

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    1. Exactly why this whole inflation only being 1.7% or whatever is stupid. They changed the way inflation is measured. Some like Peter Schiff say if inflation was measured the way it was in the 70's, it would be more like 8-9% today.

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    2. And that makes Concord's point. There is certainly enough inflation. now, much more then in the 2004 to 2011 time frame to cause a big up move in gold. If it wants to.

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    3. It's all government "management of perception" economics. As soon as people perk their noses up and start to sense high inflation, the metals complex will change. Never before have they coated economic numbers wiith such BS to keep the perception of a recovery alive. Gotta keep those low information voters in line.

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  16. The only thing I can say at this time is "short gold, short gold shares" not a fun statement but so far it has been the only strategy that has given me some of my losses back.
    I can't believe there are actual longs out there...anyone here buying any long positions?? or even adding to their gold position??

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    1. But why did the falling price of gold stop at all? Wasn't it because the physical buying became too great, plus technical targets were reached where some profits are automatically booked? So, if we are in a gold PHYSICAL bull market (as some say - looking at Eastern buying) while in a PAPER bear market, when does PHYSICAL have the mass to stop PAPER?

      Another question, how can PAPER gold dictate to PHYSICAL gold what the price will be? How can PAPER to PHYSICAL ratio be 83:1 as I saw in a quote of the Indian government? What does that mean in apples to apples equations?

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  17. I have another big question. If those who know stuff could so kindly again fill me in. (?)
    We know that when the Equities go into a bear market as in 2008, then other things get sold to raise cash (to cover margin calls, to buy shares when they get to the bottom, or etc.), therefore Gold and all commodities got sold. My memory is fuzzy on this, but it seems this was rather regularly occurring.
    I remember Dan saying "gold is being sold perhaps because its the only thing some funds have a profit in" at one time. (?) Anyway, holdings of Anything get sold in general to cover margin calls.
    So, here is the question, when the equity markets go into a bear, and funds have lots of in the money SHORT gold holdings, do they COVER shorts in order to raise cash to meet their needs for equity losses or what? I mean, they do not SELL MORE gold, do they, when they are short of CASH, because it requires CASH to SHORT gold (?).
    Please advise.

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