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.]