Thomas
DeChastelain
Memorial Archives

Gold Sector Update
posted Jul 17, 2004 at 03:12PM

Introduction

Same old..same old..the past week showed bullion acting resiliently, the dollar wobbly, and gold stocks underperforming.

Indeed looking at the entire market one continues to see clear evidence that the "reflation" trade that propelled all equities over the past year is coming under greater strain.

Gold Daily Chart



Not much to add as long as gold remains within the price channel. Obviously from a short-term trading perspective one would become more interested in gold vehicles if bullion dropped back to its lower trend-line in "corrective" fashion: but there in no guarantee that will happen.

HUI Daily Chart



Above is the "glass is half-empty" interpretation of the HUI. Aggressive short term traders sensed the weakness and were initiating short positions.

However one can also say that the index remain "coiled" under important resistance and the negative bets that caused the index to fade Friday afternoon will be the catalyst to propel the index towards a test of its 200dma.

Trading advice? Again too much depends on where you are sitting. However it would seem likely that a breach of resistance would lead to a move to the 200dma if not higher.

A breach of support of course has the bearish implications noted above.

For myself, I remain "sitting tight" on my cash position. As they say, a difficult thing to do, but easier when I look at the charts below. All of them show that unhedged gold stocks are underperforming or diverging bearishly from other categories.

HUI Warning Signs









I don't believe this is just about gold stocks, but a warning about liquidity conditions in general, which will, indeed, is affecting all equity markets. Note the following charts.

Liquidity Crunch or Rish Aversion?





So here we have a situation where not only is tech underperforming the blue chips, but that the semi-chip sector is underperforming tech in general.

Liquidity crunch or just a growing aversion to risk? - it just shows why so many oversold stocks are getting more oversold...they can't catch a bid.

In my opinion if the above two charts were just about risk aversion, due to geo-political concerns or economic down turns, then gold stocks would not be affected - as these are usually supportive factors.



Again just another factoid, that underneath the usual drivers, there is a liquidity crunch going on.

Dollar Check



USD COT

EuroFX COT

COT data is supportive of the dollar. Given that I make money on long sides of the trade my nightmare scenario is that the dollar does some kind of W bottom and then has some kind of year long corrective rally. My current view is not geared for that.

Yield Spreads



Yield spreads remain unsupportive of gold stocks. The lack of even a half-decent bounce, to me, is just another sign that something very bad is coming to our local screens.

Bonds



Is it not conventional wisdom that people flee to bonds during economic downturns? Well the signs of economic down turns are everywhere.




When I look at these charts I see little that supports the claim that bonds are dead. Long term trend line reamain intact. Recent chart behaviour shows impulsive action, which implies that even if we get a correction soon, higher prices will subsequently follow.

But how can this be? Any economic analysis suggest that bonds should be plummetting. I do have a theory but putting it here would make this commetary a little too bulky and goes well beyond the scope of a gold sector update.

I will have a separate commentary posted up soon and I think it will be of interest to all gold market observers.
Indeed I think it will hold the key to tell us when the major legs of the gold bull will start.

Summary

So to wrap up. My reading of the tea leaves says that caution is due. If the HUI breaks resistance then the bullish case stays alive. A break of support should not be taken lightly as I feel there is considerable downside risk.

The threat of a liquidity crunch is not even on the radar screens of TV punditry, but I am of the mind that the threat is very real.

Good Trading.


Disclaimer:


The above is written for educational/entertainment purposes only. Under no circumstances should it be mistaken for professional investment advice. The commentary simply reflects the opinion of the authour on the current status of the market. It is prone to error and to change with no notice which itself is again prone to error.

Bullet Bullet Bullet