Thomas
DeChastelain
Memorial Archives

The Gold Sector
posted Jul 10, 2004 at 05:46PM

Introduction

Although in previous discussions we discussed a variety of "scenarios" for the gold market, they really boil down to two options.

One - We are at the start of a new major upleg for the gold sector and the train is leaving the station and the march to new highs has begun or:

Two - We are in a countertrend rally whose only purpose is to keep the bulls interested, to suck thier capital into the market, and to unwind deeply oversold conditions.

Perversely both would agree that the place to be is long. One seeing this period as a time to add to current positions and for new participants to enter the market. The latter strictly as swing trade opportunities.

This period of relatively "peaceful coexistance" may be coming to an end. We are entering technical areas where people's convictions will start to be tested more rigourosuly.

As the gold market moves up profit taking and the initiation of short positions will go up against those emboldened by gold's new found momentum.

Just to be upfront on my "bias" I ended the week with all positions closed and in a 100% cash position. I am expecting a pull-back in the short-term after which I will have to decide whether to reenter. Obviously I am in the camp that sees this as a counter-trend rally, but I am not welded to that view, and acknowledge the powerful arguments being place by technicians with much more experience than I.

With the disclaimer stuff out of the way let's take a look at the market to see what we can find.

Bullion charts

Gold Daily



Gold ends the week near the top of its rising channel with stochastics near a cycle completion, and some bearish divergence on the histogram.

Although everyone looks at the 200dma it is the bottom support line that is key: to me a stochastics cycle that breaks through the 200dma but holds the trend-line would indicate a good place to get back in.

Of course if gold starts out strong and breaks above and holds above the resistance line - that has very bullish implications going forward. (I would start looking at some of the laggards)

Of course breaking that trend-line to the down-side would start putting pressure on the more committed bulls.


Fib Study



Stopped right at Fib resistance. Conventional wisdom states that breaching this resistance implies a retest of highs.

Gold Weekly



Gold Monthly

Reconciling being "bullish" or "bearish" with time frame always muddies the waters. My own view is that gold is correcting it's first major upleg and that correction still has more work to do. So in the long term I am very bullish on gold. In the intermediate term I am bearish. In the very short-term my views can change on a daily if not hourly basis. My bullion I don't even think about trading.



Gold Stock Indexes

Though bullion is up against stiff technical resistance at this point, it has been acting quite bullishly and doing everything that bulls would expect. Problems start developing when you start looking at the stocks.



Some HUI Fib Studies





HUI/GOLD Ratio



Volume Considerations





This chart made available by the traders at www.vestoranalytics.com. Amongst their free services is a proprietary gold timing system that would be of interest to all gold market observers.

Another chart showing Maclellan Osciallator for the gold sector which can be seen at www.smallinvestors.com

The series of declining peaks is a bearish divergence and implies future weakness.

Discussion

So here we have it. Gold stocks did not confirm bullion's new high. Indexes are rising on declining volume, and the number of advancers are declining with each peak. This in the best performing sector of the past three years and the with the dollar going belly up?

It makes the deflationist in me want to howl as it smacks of liquidity concerns. How many people are out there with 100% cash positions? Not many I bet. This goes well beyond the gold market and has grave implications towards all things equity.


Yield Spreads

I see no reason why Greenspan will not do exactly what he has already told the market - that he will raise rates a quarter point at a time. This may seem to be of little direct significance to the gold market, but it has a big impact on those in the carry trade - who are leveraged up to thier eyeballs.

For those who think that Greenspan won't raise rates because of elections I refer you to this rather prescient article written by Clif Droke back in February entitled,
Money Supply and the Presidential Election

Voila! An economic malaise creeping into the markets just as we head into election season full bore. Just imagine if you were in Greenspan's shoes with terms of reference to keep everything on an even keel - one could only regard the current "tax less, spend more, deficits don't matter" policy with nothing but horror.

As well, I would speculate that there are more personal reasons involved. Clinton had a strict, keep your political fingers out of the Fed Pie policy, which was rigourouly enforced...I just don't think Greenspan reacts well to current crop of political hacks telling him how to do his business.

In the end, he did it to Bush Sr. who was David and Solomon combined when compared to his offspring - not only will he try to do it, he won't lose one night's sleep doing so.



Again while it stays within this range, I believe gold stocks will lag bullion. If it breaks to upside then it is time to grow some horns...and of course the reverse applies.



Hard to put a bullish spin on the above.

Greenback Update

One of the great financial events events of our lifetime will be the declaration of bankruptcy of America. It is quite telling that despite a 20 year bull market, and being the creators of the technologies that fueled that bull market, that the USA is in many ways worse off than at the end of the 70's bear. (Compare that with Japan which by many metrics is actually better off - despite a decade of recession and deflation)

Which is to say that a healthy society will have a market, that goes up and down, but a market alone does not make a healthy society.

(Big Chunk of venemous political and philosphical rhetoric deleted for use in another, more appropriate venue)



If I am of the mind that gold is correcting it's entire move to date then it stands to reason that the dollar will do the same for it entire bear move?

You bet, but so far things are not looking too good.

Although it is due for a bit of a relief rally unless we start seeing some big bullish candles, all the tea leaves are pointing to a retest of market lows. Obviously this will be supportive of the gold market.







What will be key is observing how gold does if and when the USD retests those lows. Does gold make new highs or not? Longer term trading decisions will be based on how gold does relative the dollar market.


Other Currency Charts of Interest






The China Story

There has been lots of cooing noises stating that the worst is over with regards to the Chinese government tempering their economy. Most of this coming from commodity mutual fund managers who have a vested interest in keeping fund inflows going.

I remain dubious. If the Chinese economy is half the juggernaut advertised, then a few administrative procedures and harsh talk is not going to do the trick.

If I see the H&S pattern below nullified then I will change my mind. Everything I have read implies that underneath all the import/export activity lies a banking system on shaky, shaky ground.





Summary

Technical resistance in bullion along with bearish divergences in gold stocks point to some retracement action starting short term. The dollar is due for a bounce.

If nothing spectacular develops then I think that current trends will continue to reassert itself.

Bullet Bullet Bullet