"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


Wednesday, October 9, 2013

What are the Gold Shares Saying?

The HUI to gold ratio continues to plumb new lows over the last few months having already moved well below the spike bottom made back in late 2008 when the first news about Quantitative Easing hit the markets. The falling ratio is disturbing.

Either one of two things is going to happen - either gold shares are going to stage a rebound sooner rather than later or the price of gold is going to start moving lower at a faster rate than the shares. There always remains the possibility that both will rise higher in sync with the shares outperforming to the upside. That would restore the ratio but thus far the technical charts of the HUI index do not show any serious buying by anyone but the value crowd.

The ratio has fallen through every single Fibonacci retracement level shown on the chart drawn off the 2000 low and the 2003 high. Classic Fibonacci theory would tell us that if the 75% retracement level is bested, odds favor the entire move being erased. that is more than sobering; it is a catastrophe.

It is telling that no matter what gold does, the shares simply cannot seem to gain much in the way of traction to the upside. Perhaps that will change but thus far the shares, which have been rather good at predicting in what direction the price of gold will be going, are heading lower.

One wonders just how far this ratio will continue to move. This is the reason that I have strongly recommended to miners that if they have the opportunity to lock in some good profits on gold under production, that they do so, at least a decent percentage of that production, to ensure those profits. In other words, hedge or use some forward contract methods so that they do not sit there and watch the metal sink lower on them without any downside price protection.

The ratio at such low levels would seem to be saying that there is a distinct possibility of lower gold prices ahead. Gold at $1300 is certainly not the same as gold at $1900 but if a miner can dig it out of the ground and secure profits at that price, why risk all of those profits? Something is going on in the mining shares which simply makes investors reluctant to buy them even after such a protracted decline. Perhaps investors are wondering whether profits are in the picture before they put hard earned capital at risk.

Gold Stuck in Limbo

It cannot get into heaven and it does not yet appear to be headed down into hell. So it goes nowhere bouncing up and down, without any apparent rhyme or reason. In short, trading gold right now is a complete waste of time unless you are a glutton for punishment or have the absolute shortest of time spans before pulling the trigger on an ultra short term trade. Translation - unless you want to scalp this market, leave it be until it makes some sense.

I still feel that the intermediate and even the short term trend is down but with the sort of wild intraday price swings it is currently experiencing, there are better opportunities elsewhere to trade.

It does seem as if there is a large enough contingent of dip buyers who are trying to keep it levitated above $1300 to make it tough for the market to actually break and stay below that psychological support level. Based on the current action in the mining shares however, odds favor a breakdown of that level sooner rather than later in my view. While the HUI did manage to close near the high end of today's session ( some of the individual stocks that comprise this index actually closed in the green), the chart pattern on the HUI still looks atrocious. I would want to see some improvement in the miners before feeling any positive vibes toward the actual metal.

It was rather comical reading the comments today from those who were foolish enough to try offering reasons for the inexplicable. First was the news that Yellen - Ms. Dove of Doves, will be heading the Fed. That was viewed as friendly towards stocks and somewhat towards gold. Then the market seemed to focus back on the partial government shutdown and upcoming debt ceiling battle and that brought out the forces of deflation. Then we got some employment numbers from private firm ADP. "Go this way and that way and this way and that way".

When the FOMC news hit the wire gold was all over the place as traders tried to make sense of the oracles who sit on that committee.

Some FOMC governors wanted to taper; some did not; some were concerned about the Fed's credibility; some were concerned about this and some were concerned about that. Some wanted to taper before year's end. All of this is moot in my view because what some may or may not want is rather immaterial in my view. What is not immaterial and what will ultimately have the final say is the economic data coming our way. I repeat, it is difficult for me to see them tapering anytime soon based on the anemic, miserable state of the US economy.

Back to the charts only briefly for the reasons explained above ( it is stuck in a range trade).

Price remains stuck in a very broad range between $1280 or so on the bottom and $1340 or so on the top. Within that broad range is a secondary range with $1300 or so on the bottom and $1320 or so on the top. Bulls have no chance of getting anything going until they clear $1340 and keep the price from falling back below that level. Bears have no chance of getting anything sustained to the downside until they push through $1280 and prevent price from recapturing that level.

The current bias is negative based on the indicators presented with those favoring the bears. Additionally, volume on up bars is lackluster reflecting the lack of bullish enthusiasm.

Simply put, I am not sure how much longer this will continue but until one side or the other grabs the ball and runs with it, we appear to be stuck in limbo. Hopefully something will change soon and we can get some sort of decent trend, even if it is down to at least escape this nauseating go-nowhere - do nothing market.

What I am watching is the slide in crude oil prices along with lower gasoline prices. That is certainly not contributing any upward pressure on the overall commodity complex in general which continues to slide lower. It is difficult to see gold managing any sort of lasting rally as long as this index drifts to the downside.