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: A Rally No-One Really Believes in

A Few Remarks on the Technical Situation

In our last update on gold and gold stocks we discussed a simple method to identify whether or not an upturn was likely to morph into a longer term rally or not, based on market behavior near past major lows. This particular test is obviously still ahead of us.

In the meantime, the short term correction we suspected would soon begin has indeed commenced (there was one more strong up day right after the above mentioned post). As we pointed out, with gold approaching its 200-day moving average (silver had already reached it), one had to expect a pullback regardless of what the medium to longer term trend would eventually turn out to be.

Here is a look at both metals:

1-Gold, dailyGold runs into its 200 day ma and pauses. This is no surprise, as this moving average has contained a great many previous rally attempts – three in the past year alone, including the failed breakout attempt in January – click to enlarge.

2-SilverSilver is similarly hampered by its 200-dma, at least in the short term – click to enlarge.

Both metals have become slightly overbought as well, so traders are evidently reluctant to jump aboard at this particular juncture. There is however some statistical evidence that gold’s recent close above the 200-day moving average may be more meaningful this time. As Jason Goepfert of sentimentrader reports:

“Gold has broken above its 200-day average for the first time in 100 days once again. That’s the third time in the past five years. It has had multiple failed breakouts after being below its 200-day average for more than 100 days several times in the past 40 years. The third time it managed to break above its average coincided with sustained rallies during the next 1-3 years. One caveat (besides the small sample size) is that there were a few times that it *just missed* the 100-day cutoff, which would have preceded the long term bottoms by several months at least.

Obviously this statistic has to be taken with a grain of salt given Mr. Goepfert’s reservations noted above, but we wanted to mention it for the sake of completeness. It is clear though that pullbacks can also be quite informative, so we now have an opportunity to get a better handle on the nature of the recent rally.

If a trend change is underway, then pullbacks in gold stocks should remain relatively contained, either by a typical Fibonacci retracement level or the 50-day moving average (such as e.g. happened in 2000-2001). Naturally, gold stocks will still tend to magnify the moves in gold itself.

Below is a daily chart of the HUI and the HUI-gold ratio with a Fibonacci grid between the most recent low and high drawn in to show potential retracement levels. We’re not sure if it makes much sense to apply Fibonacci retracement levels to a ratio chart, but it didn’t cost us anything to add them.

3-HUI and HUI-gold ratioThe HUI and the HUI-gold ratio with Fibonacci retracement levels. The HUI’s 50-day moving average will soon coincide with the 50% retracement level and the 38% level shortly thereafter. As noted in the annotations, it would be ideal if the RSI could stay above the 40-50 area (this incidentally applies to the metals as well). In bullish trends this level is rarely undercut – click to enlarge.

This provides us with an initial “if-then” set-up: pullbacks should not violate the now rising 50 dma – if they do, then no major trend change is in the works yet. On the other hand, a rally above the high of Wednesday last week (just above the 139 level) would represent evidence that the probability of a larger-scale trend change has increased further.

There is one more technical observation we want to share. Something has changed in the behavior of junior gold stocks relative to senior gold stocks. Whereas several previous rally attempts were characterized by junior stocks outperforming, this has not been the case this time (hat tip to Dimitri Speck for pointing this out).

Since larger investors (institutions) mainly buy senior producer stocks for liquidity reasons, while speculation in juniors is primarily the preserve of smaller investors, this is actually a small positive sign. It is essentially telling us that while bigger investors are finally seeing some value, many smaller ones have thrown the towel and are regarding the rebound as a chance to get out. Below is a chart of the GDX-GDXJ ratio compared to GDX that illustrates the situation:

4-Ratio behaviorGDX-GDXJ ratio an the GDX (when the ratio declines, GDXJ is outperforming and vice-versa). The three rally attempts highlighted by the blue rectangles have seen GDXJ outperforming. The green rectangles show the two most recent rally attempts, which are characterized by more “normal” behavior, as senior producer stocks are now performing better on a relative basis. While the first of these two rally attempts ultimately failed as well, the change in behavior has remained in force – click to enlarge.

Skepticism Remains High

What is very striking to us is that skepticism about the rally remains very high. Below are links to four recent articles (two reflecting non-mainstream opinions and two reflecting typical mainstream opinions, resp. the consensus) which provide anecdotal evidence to this effect.

We should mention that the first article was written by Avi Gilburt, who is the least skeptical of the authors and to our knowledge has a very good record of calling the wiggles of both the bear market since 2011 and the preceding bull market. However, even he is “not prepared to join the bullish bandwagon yet” as he puts it and thinks a low may only be put in place in a few months time. However, there isn’t much of a bandwagon, at least not yet. All we really have are rising prices, which no-one seems to believe will last:

Avi Gilburt’s article is here: This is what it takes to call a bottom in the gold market. We would add to this that even if a low in gold itself should only occur a few months hence, this does not tell us anything about the action in gold stocks, which often (but not always) tend to bottom out well ahead of the metal (sometimes several months ahead, such as in 2000-2001).

The second article is by a non-mainstream analyst we don’t know, but it is firmly focused on the “potential failure of the rally”.

Here are examples illustrating the mainstream opinion. A Reuters survey finds Gold, silver set for more pain into 2016according to the mainstream consensus, and analysts interviewed by CNBC tell us that “The gold rally is doomed to fail”.

It is worth dwelling a bit on the mainstream consensus. For a while, the consensus will tend to be correct, but italways – there is not a single historical exception – misses the major turning points.

One only has to think back to the 2009 to 2012 period. It was around 2009 when a few of the major mainstream banks and brokers started to become bullish on gold. By that time, they had completely missed a rally that had been underway for a full ten years already (gold actually bottomed in 1999 at $255, although the rally only really got going in 2001 from the $270 level). “Late to the party” is an understatement.

By 2011, around 5 to 6 months before the peak, virtually all mainstream houses had turned bullish on gold. In hindsight, this was a major warning sign. However, what is interesting in this context is actually how long it took them to change their mind again.

Note here that Wall Street loves to hate gold (there is simply not enough money in it for WS, and gold rallies often spell trouble for the asset classes WS peddles). Surprisingly, almost all the major houses remained bullish throughout 2012, as the gold price increasingly struggled. It took the rather forceful declines of 2013 to turn most of them bearish again. For a while, they were quite right, just as they were right for a while at the tail end of the preceding bull market.

The same will happen after the low, only vice versa: they will remain bearish as the rally begins. The longer they remain bearish in the face of rising prices, the more bullish the situation will be. If that happens, speculators should aim to sell shortly after they all turn bullish again.

Note here that we can of course not yet say with certainty that they won’t remain right for a little while longer. It is worth noting though that stubborn bearishness is also evident in other indicators. In short, skepticism is strong and it is very widespread across a broad range of market participants and observers – in spite of a $110 rally between mid August and mid October.

We have already shown a chart of the Gold optimism index (Optix) last week. Below we take a look at the rankings of both commodity Optixes and currency Optixes. These are an amalgam of the most important sentiment surveys and positioning data.

The numbers show the percentage of traders and observers who are bullish. We have highlighted the positions of the precious metals (platinum is positively hated, while silver has garnered a few more fans, but still not even half of those surveyed are bullish). Even crude oil has more fans than platinum or gold at present. It presumably takes some doing to be even less popular than crude oil at the moment.

We have also highlighted the commodity currencies and the Swiss franc (which similar to gold is widely considered a “safe haven asset”), as well as the “anti-gold” US dollar. No currency has more bulls than the USD – while the commodity currencies are at the very bottom of the list. The colors of the bars indicate whether the Optix indicators have risen or declined compared to previous readings.

5-Commodity Optix rankingsCommodity Optixes ranked – traders and market observers are not overly enamored with the precious metals. In the case of platinum and gold they are still outright bearish – click to enlarge.

6-Currencies Optix rankingsIn the currency Optixes we see a similar theme: the dollar still gets the most love by far (though less than previously), while commodity currencies and the Swissie continue to be hated – click to enlarge.

In short, anecdotal evidence from press reports, survey data and positioning data all agree on one point: veryfew people believe that the recent rally could actually be for real.


With a pullback underway, we now have a chance to judge its nature – this should soon tell us if the recent rally was just another fluke or if it retains the potential to become a more sustained advance. We will have to analyze the technical evidence as it emerges, but keep in mind that this can be quite tricky.

Meanwhile, the fundamental backdrop is still mixed, but it is definitely more bullish than it was only a few months ago (short term rates have declined again, junk bond spreads have continued to widen, financial stocks have underperformed the broader market, the dollar looks wobbly of late and central bank “credibility” is increasingly under scrutiny).

Lastly, anecdotal and positioning sentiment alike are consistent with a major turn, especially as a quite sizable rally has met with disbelief all around. This does of course not rule out another trip to lower levels, as Mr. Gilburt remarks in his assessment.

Eventually the market requires doubters to change their opinion – ultimately, Gold Optix readings above the 50 level are required to actually confirm a new uptrend. However, it is a good thing when skepticism stays pronounced in the early stages of an advance. The 200 day-moving averages represent the next major hurdles from a technical perspective – if they can be overcome decisively, we would expect to see a surge in optimism (with the mainstream houses likely to stay bearish for a while longer).


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