"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


Monday, May 9, 2011

Gold - 4 Hour chart update

The spike off of the region near $1460 and subsequent move strongly back above $1500 is indicative that a bottom has been found in the market. Keep in mind that $1500 is a psychological resistance level.This is not to say that the market now goes straight back up however and returns to its all time high in short order. What it does say is that buyers see value in gold below $1480. Now we will wait to see where selling might develop. That will give us a better feel for the new range than gold is carving out.

If you note on the chart, the 50% retracement level of the last leg down from the recent peak comes in just above the market near the $1520 level. That looks like a reasonable target for the short term. Let's see how it handles that region. A push past here could potentially press as high as the $1530 level. If price can best that, then $1550 comes back into play. If prices fade here and selling comes in, then we will head down towards $1500 again to retest that level.

The potential fly in the ointment, much to my surprise, is the lackluster performance of many of the gold shares as evidenced by the HUI and XAU. While both are higher today, neither one has mustered sufficient strength to have taken out Friday's session high on the charts. That is rather disappointing considering that these stocks led the metals on the way down. I fully expected them to lead on the way back up for a short while. As of right now, they are in a follower's role instead.  It is also noteworthy that they are lagging against a backdrop of a rather strong day in the broader equity markets.

I should also point out that while the Dollar is now weaker as traders repurchase the Euro positions that they have thrown away last week, the strength in both gold and silver was occuring while the Dollar was actually higher earlier in the session. As the greenback began to fade going into the afternoon, that generated more buying across the metals, and the crude oil market as well I might add, which took them to their best levels on the day. Hitherfore, price in gold could not get above $1510 and stay there. It took that out as the Dollar dropped back below 75.

Gasoline has erased almost all of last Thursday's enormous drop after spiking off of the $3.00 level on Friday. Hurry up and fill up your truck before the price goes back up! That nice drop in prices that some were expecting to see at the pump suddenly has been cut in half for no particular reason other than the fact that the hedgies were buying today.

It is noteworthy that unlike what happened in 2008 during the commodity downdraft, this time around we have had a plethora of new short sellers enter the commodity arena. Back then it was predominantly long liquidation which was met by commercial short covering. This time a lot of players decided to actually institute brand new short positions hoping to catch a wave lower. Based on the market action of today, with the Dollar dropping back near 50 points off its best level of the session, a lot of these Johnnie-come-lately shorts were crushed across both the metals markets and the energy markets. some also had their heads handed to them in the wheat market.

I want to observe the price action for tomorrow and the next day to see what the markets might be telling us as to what lies ahead. It is a bit too soon to say conclusively but it does indeed appear many of these commodity markets have bottomed out. Again, I want to repeat, this is not the say they are going to now reverse and go straight back up again. It is to say that there evidently remains many well funded players whose macro view has not changed and who are looking to buy into these price breaks as they wait for the downtrend in the Dollar to reassert itself at some point.

Bonds finally faded later in the session after stupidly moving higher even as the equity markets were soaring upward and the Dollar was swooning. That market bears watching as it has been signaling a big slowdown in the US economy with its move higher of late. Whether rates have moved as low as they are going to based off of that thinking is unclear. Some might feel that long term rates are not going to be much cheaper and are now selling bonds.


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  2. Good sir, thanks for your keen insights. I was concerned that perhaps a test of 1450 and 28 were reasonably probable. Good to hear that you think this fairly unlikely.

    Keep fighting the good fight for/with us..

    Btw, I always liked you as a chartist, but you really won me over when you used Robert E. Lee in an illustration, and called the conflict the 'war of northern aggression'. I dig it. A class act.

  3. GDX/GLD ratio made yet another new low today.

    And margins on crude futures were just raised....

    More and more paper is being thrown at the inflation genie, so far, it is working.

  4. Dan,
    You seem surprised by "the lackluster performance of many of the gold shares as evidenced by the HUI and XAU.".
    What surprises me is the fact that you are surprised! I own gold equities and some of them since 2006 and as many investors I am very disappointed by the gold equities performance. I did forecast the rise in the POG but wanted to leverage my investments by playing mainly the shares. This is what WE get:
    Index 5 Y 3Y Today
    HUI 321 514 544
    XAU 159 206 206
    TSX Gold 350 375 380
    POG 720 880 1510
    I would add that almost ALL the mutual funds precious metals are under water -so much for the "experts" taking fees for their deep knowledge...
    Many investors in gold equities are wondering what is going on. Your explanation (or maybe it is Jim) is/was hedgies are playing gold vs gold equities. Could you elaborate and explain why we should stay invested in gold equities. Thank you for your reply.

  5. Thanks for you insights. I am currently trying to fathom the impact of the end of QEII that I believe should bring a short lived bounce in USD and a concurrent decrease in gold and silver price. What's your take on that? Thank you for any light you might shed on this topic.

  6. Thanks for the summary. Reminds me of the breakdowns you use to provide on jsmineset. It's one of the main reasons I went there.
    Hope you do them more often.

  7. Fred Hickey came up with the same data as below.

    By: Steve Saville, The Speculative Investor:

    Below is a chart comparison of the Barrons Gold Mining Index (BGMI) and the US$ gold price covering the period from 1974 through to 1984. In other words, this chart captures the final 6 years of the secular bull market that ended in 1980 and the first few years of the secular bear market that would ultimately continue until 1999-2001. Note that the BGMI portion of the chart has a linear scale whereas the gold portion of the chart has a log scale.

    The chart shows that:

    1. Major corrections in gold stocks and gold bullion ended during the second half of 1976. As an aside, these corrections unfolded in parallel with an economic rebound.

    2. The BGMI traded sideways for about two years beginning in early 1977, despite the fact that gold bullion was in a strong upward trend throughout this period. As a result, in late 1978 the BGMI was still about 50% below its 1974 peak even though gold bullion had returned to its 1974 peak.

    3. Although the BGMI finally began to trend upward in 1979, its weakness relative to gold bullion became even more pronounced due to gold's dramatic upward acceleration.

    4. When gold bullion peaked at $800-$850 in January of 1980, the BGMI was no higher than it was in 1974. This means that the BGMI did no better than 'tread water' over a multi-year period during which the gold price quadrupled.

    5. The BGMI and gold bullion pulled back sharply from their January-1980 peaks into April of that year, at which time the gold sector of the stock market commenced a spectacular 6-month advance that would take the BGMI to almost double its January-1980 peak even though the gold price remained well below the high made early in the year. That is, there was massive strength in the mining stocks relative to the bullion during the months AFTER the bullion had reached its ultimate peak.

    6. The BGMI and gold bullion commenced long-term bear markets in October of 1980.

    As to why the major gold mining stocks (as represented by the BGMI) fared so poorly relative to gold bullion during the huge 1977-1980 rally in the gold price, we can only surmise. We suspect that it was due to a combination of the following factors:

    a) Increasing mining costs.

    b) A failure to generate substantial increases in free cash flow due to the cost of replenishing in-ground reserves.

    c) Rising interest rates.

    d) Widespread belief that the rise in the gold price and the resultant increase in gold mining profitability would prove to be unsustainable.

    e) The political risk associated with mining in some parts of the world.

    The huge run-up in the gold-mining sector that occurred AFTER the gold price peaked in January-1980 was probably due to the combination of the relative cheapness of the stocks (caused by their subdued response to the earlier multi-year rally in gold bullion) and the general belief that the gold price would move to much higher levels over the years ahead (the majority of market participants never realises that a long-term bull market has ended until well after the fact).

    With the exception of rising interest rates, the factors that contributed to the poor performance of the average gold mining stock relative to gold bullion during the second half of the 1970s have also contributed to the failure of the major gold mining stocks to provide any leverage to gains in the bullion price over the past several years. This is why we haven't been interested in owning the major gold mining stocks over the past several years, except as short-term trades when they become very 'oversold'.

    The juniors are capable of providing the leverage we seek, although it has been a hard slog in the realm of junior gold mining stocks over the past few months.

  8. John,
    Thank you for the detailed explanation. When we compare the 1970s with the 1930s there is nothing to compare. However I expect the POG to rise to unbelievable numbers (using for example the ratio US debt/POG which shows gold around $36000) IF we get to the $3 to 5000 what you are perfectly well describing will be obsolete and all gold equities (and in particular the juniors) will get us outstanding returns.
    Thank you again for the comments.

  9. I am new hear to the blog. I found it through KWN. I am a silver bug. I have been buying it for about a year since I woke up to what's happening in the world. I am married with two small children and still employed thank God. I am looking to start investing in the junior miner but really needs to make good choices. Any help on finding the quality juniors out there? I am looking at US Gold, Menara, Esperanzo, Mega so far. Thank you for sharing your wisdom.


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