Gold Shares Continue Strong

Once again another day passes in which the mining shares continue to lead the bullion markets higher. Today the HUI tacked on further gains jumping over 4% in the process compared to a 1.2% gain in the yellow metal.

As long as these shares continue to trek higher, the metals have some additional upside to run.

The key is now what do the shares do now that they have reached a strategic chart resistance level. Notice that they have run to the 200 day moving average. That is a big accomplishment as it has been a long time since the HUI was trading above that particular moving average. To be precise, one has to go all the way back into late 2012 to see this! It would not be unexpected to see this level hold the market for a bit as it takes some time to digest these recent gains. If the bulls keep pushing however, and if the shorts continue to exit, there are two separate overhead resistance zones that the index will try to reach. The first is near 250; the second is near 260. Pushing through both would allow for a test of what should be very, very strong resistance near 280.

I have noted on the Directional Movement Indicators some interesting developments. The upward progress of the index has now taken the +DMI to its best reading since September of 2012. I do not know whether this is a pleasant development in the sense that the index was trading between 520-525 at that time! OUCH is far too mild of a word to note the devastation that has occurred in this sector. Objectively however, that denotes the strength of the recent buying.

The flip side is that the -DMI reading is also at its lowest reading since that same September 2012 period.

One could therefore make the case that the sector is overbought and due for a setback in price. If we did get such, it would not therefore surprise me. The question is whether the bulls will allow for a pause and cash out of some profitable short term trades or if they want to try to push for some more gains before ringing the cash register.

With the ADX rising and just shy of 29, the market is trending higher. That means we should expect to see dip buyers emerge on any setback in price that we might get. The most logical zone to see this occur would be down near the breakout point of 220-222. Support also lies beneath that region near 210. Bulls would not want to see 210 give way as the market would probably fall to 200 to test this important level.

Once again, we had another day in which the US Dollar was weak although that weakness was rather muted. What seems to have been the driver today that goosed both gold and the equities higher in unison was the theme of Janet Yellen's dovishness. The market is convinced that the Fed under her leadership is going to be quite loose when it comes to liquidity issues regardless of the fact that the Fed is on record as hoping to end the QE program completely by the end of the year. Yellen reiterated nothing new or nothing that should come as a surprise when she reaffirmed that the Fed will be heavily dependent on economic data when discussing its retreat from QE. Traders however seem to have the last two most recent jobs reports on their brains and are convinced that the doves are going to dominate the Fed.

I should note however that from my perspective the reason gold continues to move higher is because longer term rates continue moving lower. Take a look at the chart of the yield on the Ten Year Treasury note. You might recall that from the beginning of November last year through the end of December, the price of gold fell from $1350 all the way to below $1200. It was no coincidence that as this was taking place, the yield on the Ten Year ran from near 2.45% all the way to above 3.00%.  See the chart below....

As yields have moved lower for the Ten Year, especially due in great part to the fears surrounding the emerging market concerns, gold has responded by moving higher.

If long term interest rates begin perking up again, I expect gold to come under renewed selling pressure once more. The reason for this is because in spite of the great love which the gold bugs have for the yellow metal, the majority of the investment world views gold as just another asset class. Note to gold bugs - please do not condemn the messenger for stating what is obvious but too often overlooked in gold bug circles. What this means is that those who buy it do so not for any yield, dividend or interest payment it might happen to be able to throw off ( it has none) but rather they buy it in the hopes of capital appreciation when they can sell it at a higher price than they paid for it. That requires an environment in which gold is constantly rising higher. (remember the pillars of a bull market in gold).

If gold stalls out in upward movement at the same time that interest rates on the long end of the curve begin to move higher, investors looking to obtain RETURN ON INVESTMENT will jettison gold in favor of another asset class that throws off gain, whether it be by capital appreciation like equities or bonds.

Needless to say it is a given that a higher interest rate environment in the US will make the Dollar more attractive than some of its Western competitors all things considered equal. A stronger Dollar can be expected to put downward pressure on gold prices ( as well as commodity prices in general ) while a weaker dollar provides an incentive for gold to rise ( keep in mind the connection between lower interest rates and a weaker currency).

Interestingly enough, the dynamic of higher interest rates tends to cut into economic growth as it runs at cross purposes to the Fed's QE program which by nature is designed to keep interest rates artificially low to encourage more indebtedness. There does not yet seem to be a consensus as to what level the yield on the Ten Year would have to run to begin negatively impacting overall economic growth but the number that I keep seeing circulating around is the 3.5% level.

Time will make all things clear however.

I will leave you with just a bit of simple advice which I am repeating from yesterday - now that gold is rising higher, resist the urge/temptation/folly to throw caution to the wind and begin swallowing all the usual wild-eyed predictions that will inevitably surface. Stay calm and reasoned and above all - stay a hard-nosed realist.

If gold stops rising, look for factors across the other various markets that are at work instead of the simple-minded "gold is being manipulated" once again chatter. None of these markets trade in a vacuum nowadays but all are interconnected in ways that can be discovered if one takes the time to diligently dig and examine the various reactions that occur regularly through the financial markets. The themes do change and that is what makes trading/investing so challenging at times because we have no way of knowing when those themes will change and if they do, what the new relationship will be. Patient study reveals these things but that requires effort, lots of it.