Tuesday, February 11, 2014

A bottom in gold?

The price of gold and gold stocks have been behaving a lot better in the past few weeks and it has prompted a number of technicians to proclaim a bottom in gold. I have found that inter-market analysis can tell us a lot more about the underlying technical picture of an asset than a pure technical focus on the asset itself. My own take is that we are seeing a tradable tactical bottom, but don't count on an intermediate or long term bottom in gold.

Non-confirmation from silver
The main basis for my conclusion is the behavior of the silver/gold ratio. Silver is said to be the poor man's gold and tends to have a higher precious metal beta. The chart below shows the gold price in the top panel and the silver/gold ratio in the bottom panel.

Note how gold has rallied out of a downtrend in the top chart, which is what got a lot of technicians and goldbugs excited. By contrast, the silver/gold ratio remains in a downtrend. If gold has staged a convincing bottom, why isn't silver participating?

Now look at this same chart back at the last gold bottom at about the $250 level in 1999 and 2001. Note how the silver/gold ratio turned up well before the first gold bottom. Now look at the first chart of the current silver/gold ratio and tell me that we are seeing a durable bottom in the gold price.

A tactical buy?
The combination of a gold rally out of a downtrend and a falling silver/gold ratio suggests that we are more likely to see a period of consolidation or tactical rally in the gold price. A realistic upside rally target might be the 1400-1460 resistance zone, which is roughly where the 38.2% Fibonacci retracement level is.

Don't shoot the messenger
If you are a goldbug and want to write me about how the Yellen Fed is overly dovish and stands ready to print and debase the currency, etc., I refer you to my favorite analysis from Otto Rock. While it is somewhat dated, the truths about goldbugs remains eternal.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.


Anonymous said...

Thanks for the analysis. I am something of a gold bug myself, but I have a hybrid approach:
I accumulate physical for long-term wealth building & insurance and then trade mining stocks from a contrarian perspective (accumulating them when the sector is out of favor and then selling them during bull markets -- I don't treat the stocks as a buy and hold).

Accordingly, I scaled into mining stocks during the second half of 2013. Like you, I am thinking that by the time the weekly charts are flashing over-bought, that it might be time to lighten up. Your suggested target for physical gold might coincide with that pretty well.

A couple of other points...
I am not sure about the analog regarding the gold/silver ratio for the reason that we could one day have a scenario in which they de-couple for a short time (with silver acting more as an industrial rather than monetary metal and gold going its own way). Although on a longer-term timeframe I acknowledge that they should get in sync.

A second observation regarding how universally despised gold bugs are... most western analysts have a frame of reference which has always had the dollar as the reserve currency. It is impossible for most to even consider a day when the dollar will go away.

But history is littered with currencies which have been debased out of existence. We may be living in that rare period of time in which we see fiat currencies crash. If it happens, the dollar value of gold is 'infinity' and the gold bugs will be vindicated in a way that is quite permanent. There is no fib retracement after the dollar goes away (no counter trend rally or comeback). Instead, it will be "game, set, match -- over".

best to you,

Anonymous said...

Now with the rally in silver the last 3 session, the ratio of silver/gold is higher and silver also breakthrough its resistance. Do it change your analysis and view about precious metal?