"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


Thursday, February 28, 2013

Monthly HUI and Gold Analysis

Here we are at the end of yet another month during which the mining shares have lost ground. This makes five months in a row of lower prices.

Given the continued weakness in the sector, I thought it helpful to try to take a look at the monthly chart to see how things now stand from a technical analysis standpoint.

Comparing this downleg that began back in September 2011 to the previous downleg that came on the heels of the inception of the credit crisis of 2008, we can see some similarities. I am using standard Fibonacci retracement levels for comparison's sake.

If we look first at the 2008 selloff, we can see that it occurred over an 8 month period in which prices peaked in March of 2008 and then bottomed in October of that same year. The retracement in prices broke all of the important Fibonacci levels including the 50% retracement level AND the 61.8% level. It was not until prices hit the last remaining retracement level at 75% that the bottom was formed.

Looking at this decline, which began in Sep. 2011 and has been ongoing for 17 months now (with only 6 months that prices closed higher) we can see that while the 50% retracement level has been violated (it was taken out this month after having served as support ), the 61.8% level has not. That level currently comes in near 337. At this point, given the monthly close near the monthly low, odds favor a move towards this level.

This must hold the decline or price will more than likely move to the 75% retracement level down near 272. I know that is difficult to fathom, but that is what the pure technicals would indicate if 336 or so cannot hold this thing.

Looking at a technical indicator that has generated fairly reliable signals, the thing that stands out to me is that the 2008 sell off produced the lowest oversold reading to date. What is a bit disturbing is that the recent selloff has not moved the indicator down towards the same level that produced the 2008 bottom. In other words, it has more downside possible in a straight up head to head comparison.

I should note here that the 2008 low in the HUI corresponded to 680-700 gold. Gold is obviously no where near that level today but it is the ratio that we are interested in, not the outright price.

The HUI/Gold Ratio Chart indicates a continuation of what has now become a 23 month long trend of the mining shares underperforming or losing ground against the price of the actual metal. During the height or should I say "depth" of the credit crisis in 2008, this ratio hit a low near .2040 before it actually rebounded closing that month of October 2008 at .2699. The following month it moved as low as .2174 before closing higher at .3031.

Let's assume for the sake of argument that the ratio, which at the present time stands at .2242, does hit the same low level made back in October 2008 of .2040. Let's also assume that the HUI stops falling and remains for some time at the closing price of today which is 354. That means that the gold price would have to move back up to $1735 to have this ratio hit the same low that it made back in 2008.

Another assumption could be that the gold price stabilizes here at, let's call it $1580 but the HUI continues selling off. The index would then have to fall as low as 322 to yield us the same ratio low made in 2008. I will refer you back to the first two charts in this post and you can see, that a move towards at least 336 is possible in this index. If gold did not move at all from $1580 and the index dropped to 336, the HUI to Gold ratio would then be .2121. That is actually lower than the second worst reading in 2008 which came in November where it did hit .2174 before the rebound.

Another possibility is that the HUI would have to fall further down with the gold price falling along with it. Obviously there are several different scenarios but let's just say for now that none of them look particularly encouraging.

The big question, which none of us really know, is whether or not this ratio is going to have to move back towards the lows made in 2008 before these shares can put in a lasting bottom.

Note that I included some Fibonacci retracement levels on the ratio chart to show you that while the ratio did violate the last Fibonacci retracement level possible, the 75% level, that is did close both the month of October 2008 and November 2008 above that level.

Lastly here are some price charts for the actual metal. I cannot emphasize enough how critical it is that gold does not violate the support levels shown on this chart.

A WEEKLY CLOSE below the last level of support near $1525 - $1520 would do very serious damage to even the long term trend in gold and would suggest a deeper retracement. Note that the 38.2% Fibonacci retracement level on this weekly chart comes in precisely at the horizontal support level I have lined out on the chart. That is near $1534 - $1535. That is the first level of support. Just below that is $1520. There is nothing, and I mean nothing that I can see on this chart with the exception of a bit of a blip near $1480 that could stop the price from testing the 50% retracement level near $1415 should the red support lines give way.

My suspicions are that if the S&P 500 takes out its overhead support resistance near 1520-1530 on a weekly basis, gold will take out that $1535- $1520 support level on the downside. I hope not, but we have to be objective and try to see this thing for what it is at the current time. Do you not find it ironic that in both cases, the S&P with 1520-1530 on the top as resistance and gold with 1530-1520 on the bottom as support that the resistancer and support numbers that mark both markets are identical except in reverse?

Markets can change very rapidly, especially in this age of the infernal computer algorithm, but gold needs something to bring back its sponsorship among the big players. Let's see what the month of March will bring us. Perhaps it will come in like a lamb and go out like a lion for gold. We shall see...


  1. Dear Dan - I just wanted to acknowledge and thank you for all the fantastic analysis!

  2. Hi, Dan:
    Thanks for all your excellent posts. I am just curious, since you are currently cautious on gold and silver, and bullish on equities, can you shift a little bit towards equities for now?

    1. Emerald DT and Xi Pan;

      Thanks for the kind words....
      Xi Pan - Yes, I will try to keep tabs on the S&P 500. With the Fed pumping $85 billion each and every month into the system, it is going to be hard for the equity bears to be able to stand against that tide. I personally feel the stock market is a huge bubble that the Fed has blown, but so far the majority do not share my opinion on this and thus the trend is higher, even though I believe it is absurd seeing this thing at 5 year highs and not that far away from making an all time high. This is a classic case of paper asset inflation.


    2. Looks like the old "safe haven" is getting pummeled. The only guys I ever listened to on King World News was you and Bill Haynes. Anyone else is just hot air.

      Do you figure silver will dip into the TEENS this time around?

  3. Could it be that the USD no longer exists?
    Just out there in a digital cloud. No longer something that one can touch.
    Printing means nothing.
    The multiplier effect means nothing.
    Suitcases of 100 hundred dollars bills mean nothing.
    FX is a mystical cloud.
    What is next?
    A politician to declare it all null and void.

  4. Thank you for a very interesting post.
    By the way i am going to make a webinar about gold stocks, based on professional spectral analysis of Baroons gold mining index vs/ gold ration using more than 70 years of data history. It includes cycles activities studies and astronomy correlations.
    In keynote speech i will discuss again gold stock fundamentals, illustrating falling capital efficiency and stocks/commodities relation ship.
    To get more information you can follow this link


  5. This has been the best market the sellers have ever seen. They get to cover their shorts and always get rallies to sell again. So with the exact same gold, they get to play a game that is almost unbelievable. It can all come to an end if the longs would just take delivery. Then the game is over. As you have pointed out so many times.

  6. Hit 337.29 today, you are the man, Dan.

    We all love your blog and your contributions to Kingworld News.

    Best regards from Germany

    1. Klaus;

      Thanks for writing and for the kind words...



Note: Only a member of this blog may post a comment.