Pater Tenebrarum

About the Author Pater Tenebrarum

I'm an independent analyst and have been involved with financial markets for 31 years. I write economic and market analyses for independent research organizations and a European hedge fund consultancy. I'm the main author of the blog 'Acting Man', which presents articles on the markets and the economy, a mixture of commentary on current events as well as economic theory and history from an Austrian school of economics viewpoint.

Gold Stocks: It Gets Even More Interesting

Technical Backdrop

If only we could get a dime for every bearish article on gold that has been published over the past two weeks…but one can’t have everything. When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, it if makes it to 90% down, it will still be a harrowing experience in the short term.

We like these catastrophes because they usually mean “the stuff is cheap and there is probably something people don’t see”. That’s definitely the case here, since one of the things that has been routinely ignored is the improvement in costs and cash flows that is slowly but surely progressing at many gold producers.MponengGoing for the gold: rock driller at the world deepest gold mine, Mponeng, 40 miles from Johannesburg. You could stack 10 Empire State buildings on top of each other to cover the distance from its deepest point to the surface. It uses as much electricity as city of 400,000 people. Photo credit: Graeme Williams / The New York Times / Redux

As always we will try to focus on slightly different things than in our last update on the sector, but there is one chart we want to show the current state of, namely our “divergences watch” chart.

1-Divergences, completeThe HUI-gold ratio, the HUI and gold. So far, the “double divergence” remains intact – with alternating diverging lows. The support on which the HUI sits looks a bit vulnerable because it has been visited so often, but positioning and sentiment are more than ripe for a good rebound – click to enlarge.

While we’re waiting for the turning point, we are always interested in the potential for tradable rallies until it happens, because they tend to be so big in this sector. Just look at the last move from 104 to 140 in the HUI – that’s as if the DJIA went from its current level of 17,792 points to 24,000 points in just two and a half weeks. Will it do that? We doubt it. The HUI can – and not only that: it can rally that much and still be a few light years below its 200 day moving average. In short, these “small bounces” are really gigantic, because prices are so compressed and the sector is so small and illiquid.

Below is another chart worth looking at again for a change, namely gold in terms of the two major non-USD currencies. We’ve added gold vs. commodities to it for the sake of completeness (and not least because gold has made a record high against them in 2015):

2-Gold vs. commodities and non_USD currenciesGold in terms of commodities, the euro and the yen. If one looks beyond the usual dollar-centric view, then gold is actually acting OK – not great, but OK. Except against commodities, relative to which it has put in a new record high this year – click to enlarge.


Sentiment and Positioning

The commitments of traders reports of the past two weeks have shown a swing in the net speculative position of more than 90,000 contracts (a 40,000 contract wing was recorded last week, shown in the table below, after 50K the previous week). Given that this has happened over just this short time span, we know that the vast bulk of the selling and short-selling since the most recent peak occurred at prices below $1,100. Readers may recall that we mentioned in our last update that this particular “give-up” was still missing in the data. Now it has arrived.

3-CoT tableLast week’s CoT report with the changes highlighted – click to enlarge.


As you can see, small speculators (“non-reportables”) have swung to a net short position again – for the third time since late 2014. In chart form it looks like this:

4-Gold CoT-chartGold hedgers net position (blue), which is the inverse of the total speculative net position, and small speculator net position (in red). This is the third time since late 2014 when small speculators have gone net short. The late 2014 occasion in turn was the first time this had happened in more than 14 years – click to enlarge.


We were actually curious when – apart from the two earlier occasions in 2014 and 2015 – small speculators were net short more than 5,000 contracts. So we looked. It happened on February 2 1993. Not only was that 22 years ago, it was also a case of bad timing.

Here is another sentiment/positioning related chart we haven’t updated in a while. It shows CEF’s discount to NAV (CEF is a closed-end fund holding gold and silver bullion) as well as Rydex precious metals assets and cumulative flows. Note, all these charts are telling us is that the mood is really very bad. This is however important, as it usually means there is limited downside and good short covering potential exists. The chart is a longer term one, which also shows that gold in dollar terms is very close to a lateral support level established in 2008.

Meanwhile, CEF’s discount to NAV is back to 11.4%, at the low end of its range and Rydex precious metals fund assets are down by roughly 92% from their peak. We can infer that interest in gold stocks is a tiny bit subdued at the moment.

5-Gold sentiment-1Gold vs. CEF’s discount to NAV plus Rydex precious metals assets and cumulative cash flows – click to enlarge.


A Blast from the Past

As an aside to all this, we recently worked out that an average of 557 tons of gold has traded in London every day over the past year. That’s not exactly peanuts. The annual size of the gold market is around $20 trillion. Now you know why it makes absolutely no sense to worry about mine supply or jewelry demand or whether India imports 200 tons more or less over an entire year, or any such nonsense, as the guys from the WGC and the CPM Group do. That’s just nuts.

However, we also wanted to show you a chart comparison we have discussed in the past. This time we have made the effort to actually splice an overlay together (inspired by our friend Dimitri Speck). As we have mentioned some time ago already, the gold market since 2000 has been an eerie copy of the 1970s gold market, only everything seems to be taking about twice as long. As it turns out, it is actually taking approximately 2.1 times as long (so far, anyway). The percentage gains and losses are almost similar – and so are the patterns.

Below is a chart aligning the late 1974 peak with the September 2011 peak – the mid 1970s bear market/ correction is stretched by a factor of 2.1:

6-Gold-peaks comparisonHand in glove: bear market since 2011 compared to a visually stretched version of the mid 1970s bear market.


The interesting thing about this is that the fundamental backdrop is in many ways quite different. For instance, no-one worried about deflation in the 1970s, while today that seems to be the only thing everyone is worried about – even while money printing continues at full blast, at least in Europe and Japan. The main reason for the time compression observed in the 1970s bull market (gold would go on to rise by another 850% from its 1976 low) is of course that the gold price had been fixed before Nixon defaulted (“temporarily” as he assured everyone) and axed the dollar-gold convertibility.

Anyway, this goes to show that the shape and extent of both bull and bear markets is often quite similar, as their fluctuations are driven by the short term decisions made by greedy and/or fearful traders at any given time. The reasons (or rationalizations) for the decisions don’t seem to matter in terms of these characteristics.


A number of potential short term triggers are dead ahead. The payrolls report comes in early December and in mid December we will find out if the Fed will finally grace us with the meaningless gesture of a 25 basis points (or maybe 12.5 basis points?) rate hike from the current level of zilch. The attention given to the former event is of course directly related to the latter.

As we have mentioned previously, the threat of a rate hike has done a lot of damage to the gold market in USD terms. The actual hike could easily become a “buy the news” event (the same was true of the end of QE3, which was greeted by a $200 or so rally if memory serves) – especially given the market’s current oversold and positioning/ sentiment status.