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Gold & Gold Stocks - How To Recognize An Emerging Bull Market
Submitted by Pater Tenebrarum via Acting-Man.com,
The Current Situation
We have last discussed the gold sector in a series of posts between August 11 and September 1, arguing that an interesting risk-reward proposition could be discerned, both from a longer term investment perspective and a shorter term trading perspective. In particular, with a major support level nearby, and a great many similarities in the technical set-up to previous significant lows (plus a fundamental backdrop with growing potential to shift to a more bullish configuration), an opportunity combining potentially high return with minimal risk had emerged again (meaning that risk could be minimized by using the nearby support level as a stop).

These posts can be reviewed here in chronological order: “Gold Stocks at an Interesting Juncture”, “A Playable Rally May be Beginning” and “Update on a Tricky Situation”. Considering that in the brief rally between late December 2014 to late January 2015, numerous individual gold stocks rose between 100-200%, opportunities of this sort are nothing to be sneezed at, even if the bear market resumes again later. This view was a fairly lonely one at the time, which is no surprise given the awful performance prior to the low being put in. In the meantime a worthwhile advance has indeed gotten underway, even if it has taken a few more retests of the low before things really got going:
The action in the HUI index over the past year. During the recent period within the blue rectangle on the right hand side we discussed the emerging new opportunity (we incidentally did the same after the capitulation in late October 2014) – click to enlarge.
One thing that should be immediately clear is that there is nothing yet that can either confirm or disprove that anything more significant than another short term advance is underway. However, there are a few differences to the last rally, which we will discuss further below. However, the main point is this: it is entirely possible that the current rally will once again fail in the vicinity of the 200-day ma – but even if it does that, it will have been well worth playing it, as even now, with the index up a little less than 30% from its low, numerous individual issues have already posted quite impressive gains and even bigger gains seem likely over coming weeks.
There still remains some distance to be covered before serious chart resistance is encountered, resp. the 200 dma is reached. Naturally, this is not going to happen all at once – in fact, it appears as though a short term pullback may have begun, resp. is fairly imminent. Such a pullback would likely represent a buying opportunity. It should ideally last a few days at most and be characterized by positive internal divergences (with some individual stocks performing noticeably better than the index).
There are two reasons why the advance may encounter resistance in the short term: Gold is close to its own 200 dma, and in silver, the previous positive divergence between its market price and its fundamental price suggested by the cobasis is no longer in evidence as Keith Weiner reported on Monday (incidentally this happened just as silver reached its 200 dma).
Gold and the HUI-gold ratio. Although resistance is close, the general backdrop remains positive for now – click to enlarge.
In summary, we can state that it is highly likely that there is more room to the upside following a short term pullback; and secondly, we cannot be certain yet if the bear market will resume thereafter, or if a more significant rally is in store. Initially, a major trend change is in almost all respects indistinguishable from a bear market bounce.
A Comparative Analysis
Our ability to furnish you with a prediction is therefore limited, although we do of course have a personal opinion. What we can however do is try to answer the question “if the current advance turns out to be more than just another bounce, what is likely to happen?” In order to do so, we will simply take a close look at the past.
What happened after significant (medium to long term) lows were put in previously? How could one recognize that a major trend change had taken place? Naturally, there are always some differences, but it turns out that certain patterns tend to repeat over and over again. To keep it simple, we will focus on moving averages and what prices have done relative to them (primarily the already mentioned 200 dma, which seems to be playing an important role every time).
First we will take a look at three quite significant lows, which were followed by multi-month or even multi-year rallies: 1986, 1992/3 and 2000. We use the XAU for 1986 and 1992, and the HUI for later charts. The 1986 low and subsequent rally is in fact a textbook example of how big advances in the sector tend to begin:
1986: initially, the 200 dma provides resistance, but is breached decisively a short time later. Once this has happened, a multi-month consolidation begins, with the 200 dma turning into support. Then an accelerated rally gets underway – click to enlarge.
Next comes the 1992/3 chart – as we have already pointed out in a previous post, this was quite a tricky situation, as the low was made after several failed rally attempts (we won’t repeat here what the index did relative to gold, as this was already discussed on that occasion – here is the chart).
XAU – the 1992-1993 low and subsequent rally. Here the consolidation period after breaching the 200 dma was much shorter, and we would argue this was because the moving average had already flattened prior to being overcome, and the distance between the low and the 200 dma was much smaller. Also, the 50 dma played a somewhat more significant role during the initial rise, as it served as strong resistance for a while. The current situation has more similarities with 1986 and 2000 in this respect – click to enlarge.
And here is the pattern that could be observed in 2000-2001:
The major low in the HUI in late 2000 and the subsequent rally. One again, we see a similar pattern, with both the 50 and the 200 dma playing an important role, first as resistance and and then as support after they have been breached. The successful retest of the 200 dma from above is usually the time when the accelerated rally phase begins – click to enlarge.
So you can see that the sector follows certain patterns with respect to its 200-day moving average (with the 50 day playing a subordinated role) whenever a more significant rally is in the works. The most important characteristics to keep in mind are: at first, the 200 dma will provide resistance. Then it tends to be breached after only a very brief and shallow pullback. This is essentially the first sign that indicates that something different to a bear market bounce is happening. Final confirmation occurs once the 200 dma is successfully retested from above. After that, an accelerated and usually quite sizable rally can be expected to begin.
Now we want to briefly look at two different examples. One is the 1998 low, which was followed by a failing rally (even though it was definitely a rally worth playing). Although a breach of the 200 dma occurred at the time as well (in fact, without the preceding pullback), the retest failed immediately, and the 200 dma right away turned into resistance again:
The failed rally off the 1998 low – it was worth playing it, but after the failure to overcome the 200 dma decisively, the bear market resumed (and would only end in November 2000, in spite of one more spirited short term rally in 1999 after the Washington agreement was announced) – click to enlarge.
As you can see, the failed rally in 1998 was very similar to the failed rally of early 2015 – in both cases, the index was immediately rejected again after the initial breach of the 200-dma.
The 2008 post crash low was in many ways exceptional due to the circumstances attending it. It also produced a pattern that is slightly different from the 1986, 1992 and 2000 examples. We include it for the sake of completeness though, not least because the 200 dma once again appeared to be an important pivot.
The 2008 low – once again, the 200 dma seemed to be an important threshold, with prices struggling for a while in its vicinity – click to enlarge.
Additional Technical Evidence and Ratio Charts
Looking at a weekly chart of the gold price in dollar terms, we can see that it remains slightly below a lateral resistance level (1180-1200). If this resistance level can be overcome, it would obviously greatly improve the chances that the recent low in gold stocks was a significant one.
Gold, weekly – whether the bear market is over remains an open question. The resistance level indicated by the blue lines strikes us as quite important in the short to medium term in this context – click to enlarge.
There are a few positive indications for the gold sector that could make a difference compared to the previous rally attempts that have failed in recent years. For one thing, gold has entered a new medium term uptrend relative to commodities since mid 2014. This tends to be good for gold mining margins, as it indicates that the real price of gold (specifically its purchasing power relative to mining input costs) is rising.
Gold vs. the CRB Index – gold’s real price has been rising a lot more than its nominal price. This should be increasingly reflected in cash flows and earnings reported by gold mining firms. Note that gold has also strengthened in non-dollar currencies – click to enlarge.
The bullish percent index of the GDM (broad gold mining index) is rising after having revisited the zero line repeatedly, but remains far from overbought. In a new bull market, it should eventually become overbought (this means conversely that a failure to become overbought should actually be seen as a negative).
The GDM bullish percent index, which shows the percentage of stocks in the index that are currently on a point & figure buy signal – click to enlarge.
Gold sentiment as reflected by sentimentrader’s optimism index or Optix – an average of the most important surveys and positioning data – shows that bullish sentiment remains at a historically subdued level. This means there is room for a bigger rally from a sentiment perspective, but once again, it should eventually rise to overbought status in order to confirm that a bull market has begun (with sentiment following a rising gold price).
Gold Optix – the current level of 35 remains historically quite low – click to enlarge.
Lastly, there is one correlation that continues to give us pause and is actually a bit worrisome. This correlation is a relatively new phenomenon, which we have briefly discussed on one previous occasion. As the next chart shows, the HUI-gold ratio follows the action in the broader metals ETF XME quite closely. XME primarily reflects the action in base metal stocks, which by rights should exhibit a cyclical behavior that is different from that of gold stocks over certain time periods – especially during times of clear economic weakness, resp. declining economic confidence and/or economic strength/ rising confidence.
Why has this correlation become so pronounced? The only explanation we have is the proliferation of ETFs in recent years, as well as of resource-focused funds and trackers. It appears that when base metals stocks (many of which have far larger market caps than the gold producers) are sold, gold stocks are sold by these ETFs/funds in sympathy, essentially on autopilot. Hopefully this correlation will at some point disappear again, but so far it hasn’t – although at the recent lows, there was actually a small divergence in evidence, with XME making a new low that was not “confirmed” by the HUI-gold ratio.
Mining and metals ETF XME and the HUI-gold ratio – a close correlation that is actually illogical. When the gold-CRB ratio rises as it has done since mid 2014, HUI-gold should normally be expected to decouple from XME. In other words, this correlation is likely a purely technical phenomenon. At the recent low, the HUI-gold ratio was slightly stronger than XME, so perhaps the two will indeed decouple at some point – click to enlarge.
Conclusion
As we have said at the outset already, we are not predicting a specific outcome, although the current technical and fundamental evidence leads us personally to believe that the recent low in gold stocks is likely to turn out to be of the medium to long term variety, i.e., we believe a significant low has finally been put in.
However, our personal beliefs, resp. interpretation of the data may turn out to be wrong – we cannot know with certainty what the future will bring. If e.g. the global and specifically the US economy were to unexpectedly strengthen, the fundamental backdrop for gold would worsen again. We think this is unlikely, but it is not something we can categorically rule out over the short to medium term.
We can however state with confidence that the bubble will eventually burst and that the greatest monetary policy experiment of the post WW2 era will fail – in all likelihood quite spectacularly. So we have every reason to remain long term bullish on gold and gold-related investments.
Moreover, by looking closely at past lows of significance we have hopefully been able to provide a bit of a road map in case the recent low does indeed represent a major pivot point. Although the sample size we presented is small, we have no reason to expect that things will be much different from how they played out at previous lows. We haven’t shown the lows of the 1930s – 1970s period in this post, but can actually tell you that the patterns were very similar as well.
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Au, come on...
It's a golden opportunity to buy gold :^)
the truth is that until the Crimex is shut down and all the naked shorting is outlawed and all that paper bullshit is unwound and all the HFT computer bullshit is banned and all the criminal scumbags are thrown in jail then tech analysis will never be reliable, it's all just conjecture based on past events and market cycles that used to be reliable prior to all this criminal manipulation.
Only then will we be able to figure out a true phyzz value based on sound fundamentals.
Is that ever going to happen????
Probably not without a world war first.
How do you put 'corrupt psychopath criminal fascist system' on a chart ?
55
All of these charts are just a product of past market manipulations, and are pretty meaningless.
The cartel monkey hammered some folks today at Comex open. Goldman Sucks again.
Eventually gold (and silver) will find a bottom, but let's face it, it's still red for the year and still dark dark red since the peak on Sept 6ht 2011 of $1921.
You're right, of course. Silly to buy until POG exceeds the 2011 peak. Same way no one should have bought SPX or NDQ over the last 5 years. Much better to wait for new highs before buying.
Thanks for your insights.
The best technical analysis in the world means nothing in a manipulated market.
Yes, and some smart guy once indicated that central banks stand ready to lease increasing amounts into the market should price start to rise. How do you chart that?
Still, an interesting article.
This post is a very thorough analysis, but for the bottom to be in, I think we need to cross $1450. I am probably being a bit conservative on that call. Last night I read one analyst say that the number is as low as $1250. Personally, I'll start feeling comfortable around $1380.
The HUI has made a nice bounce off of the 105 low from two weeks ago. The HUI chart looks like 105 was the bottom, which is a good sign for the gold low to be in.
Both gold and silver are currently above the 200 DMA, which is a good sign. If they can both close above it on Friday, that could be the momentum needed for a breakout. However, I would not be surprised if we see another pull back. My gut says that the breakout won't be until January.
For those who like the upside potential of the miners, get ready to jump into a bull market that is lining up. If gold can reverse its downtrend and head higher, the miners are going to do extremely well. The majors are down 80% and the juniors 90%+. No sector is more beat up.
www.goldsilverdata.com
LOL!!! Not until everyone demands physical!
Strange game......The only winning move is Not To Play.
https://www.youtube.com/watch?v=uOoXwxqeVzg
O.T. USDJPY is having a hard time levitating above 118.6 .......... if it rolls over we could get some interesting carnage.
Not until everyone demands physical!
+ 1 trillion and all the derivatives chasing behind it!
This read don't even have "phyzz" on the radar!!!!
I think that at this point it only would require just 1% to demand phyzz and the emperor is naked.
I wonder how much further gold can go up. For the upccomming days there is still some room, and the trend is bullish, but a negative revearsal on the daily chart is lurking to drag gold down.
http://tripstrading.com/2015/10/12/gold-breaks-out-of-declining-trend-ch...
http://tripstrading.com/2015/10/14/gold-1h-chart-can-gold-maintain-the-b...
Silly analyst, charts are for twits.
Charts tell the manipulators when to perform certain actions, thereby confounding value investors and misleading chart readers.
Que the Olivia Newton-John song.
What does Xanadu have to do with it?
https://youtu.be/sCz-meHTbWs?t=1m56s ???
or...... https://youtu.be/6zwPVU92-XQ?t=45s
Wrong!
https://youtu.be/SEuOoMprDqg
It appears that the Cartel raid or smash-down is in progress as I type this. Gold just plunged vertically downward at least nine or ten dollars, maybe closer to fifteen, depending on where you start counting. I kind of knew it was coming.
The past week or so the prices seem to recover very quickly from these large drops, something seems different this time...was testing 16, now testing 16.20...doesn't want to seem to breakout quite yet...
Definitely something different going on. Every smash is almost instantly countered.
Anyone heard anything definitive from the IMF soiree over the weekend? Another rejection of CNY would add credence to the idea that the smoldering currency wars of the last couple of years is going hot.
Open interest for December silver has been falling steadily so it doesn't look like the showdown at the OK Corral is going to happen quite yet. Still, weaker USD and Au is outperforming on an inverse basis.
Only problem is that XME is a shitty indicator for Gold stocks.
Short term perspective: http://www.macrobusiness.com.au/wp-content/uploads/2013/01/blltrpa-240x3...
Long term perspective : http://d.stockcharts.com/img/articles/2015/09/14423645661281909130128.gif
im happy i got in. My financial advisers think it was really ill-informed. Gee, thaaanks ZH.
i consider the neverending gold buggery to be one of zh's least endearing qualities. still a seller. sorry. [/not sorry, mlah!]
i hear ya but pm's are about all we have to capitalize on when the wheels finally do come off while supply is still available. sure is taking a long time though
It aint ZH who keeps manipulating it.
http://www.zerohedge.com/news/2015-05-20/5-banks-plead-guilty-criminal-r...
Fucking charts. These irresponsible fucks will bankrupt a lot of investors if they teach chart reading instead of balance sheet reading. A lot of gold companies are garbage. For every good one that operates low cost mines, there will be 5 shit ones.
Don't say anything but positive bullish things about Gold on this board otherwise the Goldiban commentator Brigade here will probably try to suicide bomb your ass.
Why do I get the feeling I'm being told......
There has never been a better time to buy Gold !!!!!
Everyday is best day to buy gold.
You will end up dead with pile of gold left, while you never really lived your life fully just saving buying more and more gold :)
"Once it takes hold of us it never lets go."
-Gollum
"You will end up dead" -- Bulllshit. You are one ignorant fuck. Post depression and WWII, my grandfather's gold was the only collateral banks wanted. Post WWIII will be the same.
Until the Fed decides to drop 200 tons of paper gold in an hour, just for laughs.
I am really hoping that they smash gold sub $1,000 ... then I will pick up gold miners for pennies, and some more gold from the Peth Mint.
Anybody read the full stuf ?
theres way too many nerdy oscillators and he completely missed the crash in 96. the gold mining stocks turned lower ahead of the market (XAU down into the 40s) and then flatlined until 2003, when they lead the market higher. my indicator is XAU/INDU, the gold stocks have been a leading indicator at the last two major market turns, but there is a lot of sideways action in there. the XAU/INDU ratio has fallen to nearly half what it was when it gave the sell signal in 96, so if thats an indicator this correction will be brutal. meanwhile the ratio can remain constant and the gold stocks will only lose value as fast as the Dow, but probably not any faster. this low in the ratio should have been an historic buying opportunity with that caveat (playing ratios involves four possible outcomes, both up both down one up one down one down one up, and you eliminate one XAU down Indu up, for the most part, and if they both go up, fine, they both go down you still get burned, and of course the XAU goes up and the Dow goes down, which is my definition of a bull market.
to me the psychology of gold is important, i have it all worked out the scenarios. bull markets always climb a wall of worry so you need to learn to buy the dip (sound familiar?) or basically in a long sideways market to add positions at the low end of the range. my reasons for gold are not their reasons, i think gold has consumer value which has yet to develop in industrial nations. i expect the central banks to corner the market (here sir let me have that gold bar and let me pay you in fiat currency - sucker) and that should make new supply come into the market at a premium
i chart the XAU because it has the history, and its not subject to the same volatility. its signalling an epic rollover in equities, remember though 96 was still 4 years away from the crash.
All this technical analysis masterbation to end up with a fudamental analysis perspective on macro factors.
The only technical level you need to know is gold's target price for 2015 is $1,100 and every number less if the market oblidges.
If you see gold over $1,150 and Yellen is still beathing, you better be short. If she's not, this whole dog and pony show goes to the moon.
Price at end of September was telling. Monthly and Quarterly charts still controlled. Everything else is noise.
Still, if you really want to look at charts take a look at Au priced in Euros. There was some interesting action around the 1,000 level with a pretty nice breakout since then.
Like I said above, something's changed.
Time to short?
The only thing keeping the economy afloat at this juncture is happy talk, which is pervasive on the MSM Public perception is that everything is under control and things are looking up. The reason for this is that media loves Obama and the DNC in general. As long as he, or another left wing Dem, is in the WH, the happy talk will continue.
Consequently, the election in '16 will determine when the whole thing crashes. If a GOPer is elected to the WH, the crash will start in 1/17 when the airwaves will suddenly be flooded with nothing but gloom and doom. If the Dems hold the WH, happy talk will continue to support the house of cards until it crashes under its own weight.
Make a note that you heard it here first.
Large traders are net long Gold. Gold has met my rules for trend change to up...by my definition this is a new uptrend. This not a prediction of the future. Keep an eye on the weekly chart too, not just the daily!
up to 12 percent to buy and another 12 to sell comes to 24 percent, premiums take the fun out of the equation. Unless u never plan to sell or if shtf. I still can't shake the feeling that people are being herded into buying gold which makes me suspicious that somebody knows something that the rest do not. http://gizmodo.com/5948739/researchers-discover-bacteria-that-can-produc...
My house insurance went up last year, my health insurance went up last year, my car insurance went up last year. I think this is the year my financial insurance (gold) goes up!