Gold and its miners look ready for a big move

This has not been the happiest of weeks for PM investors. The sharp fall in the price of gold was triggered by that most feared of black swan events: Jeanne d'Arc wrote a bullish piece about gold mining stocks.

Literally seconds after hitting the 'publish' button, gold plunged by $35 an ounce, and went on to lose a total of around $70/oz from its pre-JdA-article level.

It's times like this that PM bloggers stare deep into what is left of their soul, throw their pens at the cat in frustration, and swear blind that they'll switch from writing about PMs to penning poems about lovely butterflies or creating daguerreotypes of renaissance sculpture. At least the butterflies won't change their spots seconds after a photo of them is published, and sculpture is harmless (and often armless) enough.

But I soon realised what utter nonsense this attitude was. Because the charts' indications haven't changed. And I still very much believe that we're about to have a big move higher in both gold and its mining stocks. Let me try to convince you again...

Let's start with the mining stocks. Earlier in the week I set out to show how the HUI was near its traditional lows of 480 - 500, which I argued was the perfect 'buy zone'. From recent history, this seems entirely reasonable, as the HUI has been moving in a range from 480 to 620 since November 2010.

However, there was one vital missing ingredient - the price of gold! I'd wrongly assumed that the gold price would be static at worst, and this was clearly not the case. Bad JdA. The miners were neatly in their buy zone, at the customary lows, ready for their move higher, but once gold took its big hit there was no way on earth that they were going to do anything other than fall further. The HUI hit lows during the latter part of the week of around 475, and currently stands not much above that. This low is lower than those seen during the last 18 months.

So is it game over for the HUI? We'll come to the HUI chart in a moment, but for now let's concentrate on that missing ingredient - the gold price. Clearly, if the HUI is not to break down further (let alone rise as predicted), then gold is going to have to get a wiggle on.

Fortunately, one look at the daily gold chart shows that we could hardly be in a more bullish situation. The Slow Stochastic and the RSI are about as low as they've ever been. On all previous six occasions that the gold chart has had these attributes, there has been a sharp move higher. It's possible that we're not quite there yet - the RSI could well choose to fall to 30 or thereabouts. If that happens during next week, that will be the biggest, flashing-est, buy signal for gold you're likely to see for months:




So, going back to the HUI, in Tuesday's post I set out a series of arguments for why the HUI was heading higher. They all stand, and now we have an extremely bullish posture for the gold price too, which makes me doubly confident that the HUI doesn't have much further to fall. If we were in the 'buy zone' on Tuesday, I think we're probably in 'buy zone+' now.

The current Slow Stochastic is at a level comparable to that seen the last ten times that the HUI made a sharp move to the upside. And the RSI is on its arse, again a comparable situation to the last ten big moves. For those interested in candlesticks, we've just had a run of five red ones on the daily chart, which is almost unprecedented, and which seems very unlikely to continue given the strength in the stock markets (more on this later) and the technical flags coming from the RSI and Slow Stochastic:




Tuesday's 'missing ingredient' for my bullish call on the HUI was the gold price, or rather the fact that the gold price didn't cooperate. I'm sure that if the gold price had stayed steady then the HUI would have rebounded exactly as planned. But if my uncle had tits he'd be my auntie, so there's not much point dwelling on such matters. However, the fact that a falling gold price has pushed the technical indicators for gold and the miners so far to the downside suggests that we may be treated to an even juicier entry point this week. 

[Go on, do silver.What about silver? - GM]
[Shan't. You know my views on silver! It's for fools! I want to talk about miners - JdA]
[It's that or the coal cellar, Jeanne...And the dwarves are getting mighty frisky... - GM]

For silver, if you really must insist on playing with fire and giving all your money to brokers and your counterparties, my favourite of all investments, the situation is regrettably also pretty bullish.The last five times that silver's Slow Stochastic was as low as it is today, it made an impressive move higher. In addition, the black line on the MACD is flattening, which could (could) mean that it's about to make a turn for the better. The RSI is less clear-cut, however, as it looks like it has further to fall. This factor might be negated by a quick move up by gold (which would probably drag silver up with it), but I wouldn't necessarily bet on it.

If there's a further sharp fall in silver during next week, however, then I'd be all over it if I didn't hate the grey metal so much out of blind prejudice:




OK, so here's a note of caution amongst this sea of bullishness [note to self: stop mixing metaphors in such a ridiculous fashion]. If Tuesday's 'missing ingredient' was the gold price (or more rather its plunge), then what possible missing ingredient(s) could derail my plans for massive wealth and success next week?

The stock markets. They've been on a tear, and returns have been quite astonishing during the last few months [quick note of smugness: Lloyds-TSB has gone from 21.8 to 37.6 BPC since my article here]. More than a few analysts are predicting a sharp correction. If this happens, then the miners are likely to get pummelled as they are usually the first risk assets to get sold off in a fall. So we need to be a little paranoid about the state of the equity markets.

Let's take a look. Normally, a chart of the S&P would appear at this point in this kind of blog article, but I'm shunning that because, as a Brit, I'm a bit sick of just how much all the other world equity markets are routinely ignored on the blogosphere. So here's a chart of the FTSE 100 instead (yes, we have stocks in England too. And electricity and fire and everything...)



Now, far be it for me to contradict analysts who are far cleverer, more successful, and probably better in bed than me. But the chart of the FTSE doesn't look like it's especially vulnerable. True, the Slow Stochastic is at very high levels. However, although such a state of affairs for gold or silver has always meant a quick sell-off is close at hand, a quick check of the past four times that we've had this situation for the FTSE shows that a sell-off was not forthcoming on three out of four occasions. The MACD is at a critical point: if the black line clears the red, then we're going through the pyschological resistance level of 6000 and that fact alone will sustain the rally for a bit longer. If it turns away, then a correction to the 50-day moving average seems on the cards. But that's only a correction of 2.3% (so whoopee-do, in other words: miners can both fall and gain 2.3% before you've finished your breakfast croissant).

Given the current liquidity sloshing around the system, the pressure on the US long bond (and Gilts) driving money into equities, and the fact that the RSI is not indicating that the index is overbought, I'm quietly optimistic that the much-hyped equity 'crash' is not coming just yet. But I'll probably come to regret those words five minutes after the LSE opens on Monday...

In case you're worried that the FTSE might be a special case (it isn't), then here's the same chart, but for the NYSE, where most of the 15 miners in the HUI are listed:




It's a similar story, although the MACD looks even more bullish than that for the FTSE.The Slow Stochastic and RSI are not especially troubling, for similar reasons given above for the FTSE chart. And any correction that occurs would seem most likely to be targeting the 50-day moving average, which is not too concerning. However, as both the FTSE and the NYSE have recently successfully tested the 50-dma, recent history would suggest that another retest might take some time.

So, to conclude, I'm re-stating my call. The HUI chart looks bullish, the gold chart looks bullish, and the main threat to the HUI (a collapse in the stock market) doesn't look like it's on the cards (yet). Sentiment towards the miners is on its knees (so the smart money should be moving in).

I already have quite a substantial position in miners, but I'm likely to add a few more shares to the pile if there is a further dip (not least because I want to cost-average down after buying a bit too early last week). Hell, I might even pick up some silver if it goes anywhere near $28 an ounce ;-)

Good luck to all.

JdA


[FULL DISCLOSURE: I have long positions in a number of miners (ABG, AGQ, CDE, RIO, RRS, TPJ) and may initiate new long (or even short) positions in the near future, depending on events. I am also long physical gold.


The above analysis is purely for information. Any positions you establish are your own responsibility, and you should perform your own due diligence. Markets disobey 'rules' all the time, and you should be prepared to withdraw from unfavourable positions if circumstances change.


And anyone who claims to know what will happen next in the markets is either a fool or a fraud.]

13 comments:

Jeanne d'Arc said...

As of Monday, so far, so good. Both silver and gold have had a break, and the HUI got about 480 (although both gold and the HUI have since retreated).

What we need now is confirmation. Mondays are traditional 'red' days (and so often a good time to buy). I'd hope to see some good action tomorrow (Tuesday) to give me some hope of confirmation of the move. Even if that doesn't transpire, however, I won't be too despondent. I have faith in the analysis presented above, but it might take a bit longer to get there.

That said, as with all trades, I'm not emotionally attached to this one, and if the charts prove me wrong, then I'll exit and take the loss. The market makes widows from emotional attachment every week.

JdA

Jeanne d'Arc said...

That said, I now need to add HMY and NEM to my Full Disclosure... ;-)

Byzantium said...

Hi,

a fellow Brit here. Just found your blog through a TFmetals link.

I have a HUI portfolio, but after MFGlobal, I do not trust the brokerage firm. (I am underwater now, so am stuck; hanging in for that breakout).

Can I ask whether you are investing in the HUI as a UK citizen, and if so, how so, and your view as to the counterparty risks....?

Thanks

Jeanne d'Arc said...

Hi Byzantium - thanks for passing by, and for leaving a comment - it's appreciated.

I understand the lack of trust following MF Global. It was probably a game changer for retail investors (but not, in my opinion, the real money, which is what counts for market trends, after all). But it helps that I don't trade on leverage (I like to sleep at nights, and I'm not that greedy), and that I'm a bit old-fashioned in that I either get certificated shares or shares that I can certificate quickly and easily. And people dismiss the value of dividends (for cheap shares) too easily nowadays, in my opinion.

I'm happy to tell you a bit more about how I trade, but I have to make clear that this is NOT trading advice. Everyone has their own style, and you'll notice that the above article carried no buy points or sell points, or even a discussion of which equities to buy (if readers choose to buy): all that's up to the reader, and none of my business. The reader can go ahead and short the HUI for all I care - Screwtape is not a trading site, and what readers do with their money is none of my business.

I just have a general theme for my posts of identifying where 'smart money' might move next - I'm fascinated by money flows. And for me, the money flow is likely to come out of bonds and financial equities, and rotate into the mining sector. The charts suggest this, so I'm calling it. I could well be proven a fool (and a ruined fool at that) by the end of April. But let's wait and see...

Jeanne d'Arc said...

So, all those caveats said, here goes:

For this call, I'm buying individual mining equities. The HUI has 15 of them, but I've bought others too. I buy them through a UK broker. Some are listed on both US and UK indexes (e.g. RandGold and Barrick), and for those I'll buy the UK 'version' as the stocks are less liquid and so more volatile (meaning the ups are bigger ups). RandGold also has the advantage of having no stamp duty in the UK, which saves you 0.5% straight away.

I'm a position trader, meaning I'm not looking for a quick in and out. When I buy an equity, I plan to hold it for a few months at least. But I am constantly looking for undervalued shares: those for which the RSI and the Slow Stochastic are near rock bottom. If sentiment is at similar levels, then it looks like a good deal to me.

The fact that I made the original call with the HUI at around 495 (and bought in at those levels), then bought more at 475, and then again at 465 does not bother me in the slightest. I'm confident in the oversold state of the miners, so I'm happy to average in in this way. The lack of leverage makes this possible.

The counterparty risk is that the company goes bust. I rate that as very low risk for the HUI miners. The shares are usually in my name, and even if they're not, I trust my Nominee broker. Perhaps one day I'll come unstuck because of this. We'll see...

Finally, all my arguments above could easily have been applied to Lehman brothers in 2008. RSI and the Stochastics hit the floor, as did sentiment, and there was no general view it would really go bust. So don't trust bloggers for trading advice ;-)

Byzantium said...

Hi again, nice to chat with someone in the same timezone.

yeah the investor has to make a choice between the ease and agility of trading realtime through an online broker, or the avoidance of risk by owning the paper shares. Or is there a middle option?

Regardless that I have an online trading account, but like most people, I haven't got a (human) broker, through whom I could buy / sell actual share certificates. How does one get / select one? Is there a materiality / viabilty threshold?

Sorry for the dumb questions.

Finally, interesting thing about the HUI, several of the companies had mine closures or other bad news specific to that company.... but ultimately drags the index downwards. It makes me worried where that stream of bad news might end, & why the market only responds to bad news (good news on the miners never seems to register on the price....)

Bradley said...

what is encouraging however is the action of some of the miners, such as GG. The GDX is also actually up on the day, despite the metals getting rocked.

Bradley said...

Even the never-do-wells AEM and KGC are having a decent day

Jeanne d'Arc said...

@Byzantium - Actually, despite being a Brit, I'm no longer in that time zone, I'm afraid. Sorry about the delay in replying.

Don't get me wrong - I have an online trading account, and I use it all the time. Any certificated shares are my 'keepers' - those great trades bought at bottoms which I plan to hold long term. Several online trading accounts give you the option of certificating shares for a small (usually very small) fee: shop around.

Yes, the HUI is a mixed bag. But don't forget that the 15 companies are 'weighted'. GG, ABG and NEM are the most heavily weighted and can perhaps be considered less of a 'risk' than the smaller-weighted enterprises. I generally like a mix of seniors (from the HUI) and juniors (as lottery tickets), but each trader/investor has his/her own strategy.

Jeanne d'Arc said...

@Bradley: Yes! NEM and a few others had a reversal day - pretty bullish action. And the GDX look like it's put in a sharp bottom too. RandGold (on the FTSE) was up by 4% today at one point too - that was one of my better buys yesterday.

But we shouldn't get too excited yet. I stand by my calls that the miners are due a solid reversal. But that can take time. The gold price and the general state of the stock market remain important factors. In a year's time, I believe I will be delighted with the last weeks purchases (although I could of course be very, very wrong), but we could be at similar levels next week or even next month.

Hence my use of the phrase 'buy zone'. I think we're in it, and I think the smart money will enter here. But a rocket shot - although possible - is not something I'm saying is a certainty or even especially likely.

Byzantium said...

Thanks JdA for all the tips; all taken on board.

Goldmineseeker@gmail.com said...

Nice to see a fellow Brit blogging on the miners. I'm most interested in the juniors at the moment, they have been punished for a year but the Canadian Venture is showing higher lows compared to Hui showing lower.

Juniorgoldminerseeker

Also for anyone keen on juniors Bill Cara is starting a new review of 100 juniors later this month.

Jeanne d'Arc said...

I just passed by to post a link, and re-read my comment on Wednesday:

"RandGold (on the FTSE) was up by 4% today at one point too - that was one of my better buys yesterday [Tuesday]"

You have to laugh, really, don't you? If you didn't laugh, you'd cry... :-)

Anyway, here's the link. It's a very bullish piece on gold miners from Zeal, which supports a lot of what I've been saying here:

http://www.elliottwavemarketservice.com/2012/03/gold-stock-panic-levels/

And the RandGold? I've been hoovering up more. This could be the most splendid buying opportunity in years, given that I think gold stocks in general are due for a big move up and RandGold now has a lot more upside than it had on Wednesday. But of course, if the situation takes a turn for the worst in Mali (which is entirely possible), then I will be ruing my decision to the end of time... Such is trading...