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Gold's rally has been accompanied by a rally in gold stocks, particularly those of the producers. The chart shows that GDX, the gold-miners ETF, has risen relative to gold over the past month.
One of the compelling reasons to buy gold stocks as gold rises is, of course, their tendency to outperform the underlying metal; i.e. the price of a stock is leveraged to the price of gold. Analysts at RBC Capital Markets argue thatgold stocks with above average leverage tend to have two key attributes. First, relatively high cash production costs (generally a bad attribute), and, second, large reserve/resource bases (generally a good attribute).
Examples cited of higher-cost producers with large reserve/resource bases relative to their respective peer groups are IAMGOLD, Kinross and Newmont.
Analyst and portfolio manager Adrian Day notes:If you look at the group of senior producers, they're selling . . . at [a] 13 times cash flow multiple. I go back 20 years, and it's never been less than 13. It's been twice that in previous periods, such as 1966-67, when gold was high. In 1996, again, we were in a strong period for gold and we had 22 times cash flow. So these stocks today, given the price of gold and given where we are in the cycle, are, in my view, very inexpensive.
Where she stops, nobody knows.
The U.S. dollar, though oversold, is continuing its decline. Friday, it hit an all-time low against the euro, and the Canadian dollar closed above US$1 for the first time in 31 years.
The gold price has flattened out over the past three days, with intraday declines being met by renewed buying, as can be seen in the shape of the daily candlesticks. MACD and RSI have both flattened out as well, and the MACD histogram has begun to slope downward, indicating a possible pullback.
Silver, too, experienced an intraday decline Tuesday with a close near unchanged. This resulted in a candlestick known as a hanging man, not the healthiest sign after a runup, particularly when that formation follows a shooting star. That was formed when the price of silver was rejected at Monday's high, which, incidentally, matched June's high of $13.87 to the cent.
GDX, the gold-mining ETF, appears to be forming an island top like those in April and July. This could indicate that a decent pullback is on the way, especially since RSI has fallen below 70 after a brief sojourn above that mark. The MACD histogram is showing a negative divergence.
The U.S. dollar index has now closed at an all-time low of 78.32, just below the previous low of 78.43, set in 1992. Both RSI and MACD are in oversold territory, so a bounce here wouldn't be surprising.
The sharp rise in gold has prompted efforts by commentators to place the rally in historical context and to project the yellow metal's trajectory going forward.
Eric Hommelberg points out that relative gold (the gold price divided by its 200-day moving average) has "plenty of up-side potential" before hitting its sell zone. He notes that an "emergency rate cut in 1987 launched the gold shares by 50% in just three weeks."
But Hommelberg also expects resistance in gold at $730 and in the HUI index of unhedged gold-mining stocks at 400 — roughly where both are now, in the region of last year's highs. He attributes this to traders' fears that a bearish double top could form here in both gold and the HUI.
The Times Online reports that a leading analyst predicts the price of gold will quadruple by 2010
as buyers seek shelter from prolonged turmoil in mainstream financial markets. According to Christopher Wood, chief strategist at the broker CLSA, market ructions and a collapse of the dollar could send gold prices to more than $3,400 an ounce within the next three years. . . . Mr Wood said that the sub-prime conflagration would be the catalyst for a wider breakdown in markets.
If $3,400 sounds a touch optimistic, Adam Hamilton offers what he calls a conservative estimate of $2,300. He arrives at this figure by adjusting the January 1980 high of $850 for inflation, using the consumer price index — which, he argues, severely lowballs true inflation.
Will gold rise parabolically within the next several years in a mania similar to the one in the 1970s? If so, these are early days yet.
It's taken its time, but silver has finally joined the party, breaking the downtrend line from its April high as well as its 200-day moving average.
Gold, which is now above its May 2006 high, continues to rise with remarkable momentum despite being overbought, as indicated by an RSI above 80. Although there are no further peaks to provide resistance on the way to 1980's all-time high, it may not be long before the yellow pauses to digest its considerable gains since the breakout at the beginning of this month.
Looks like those short GDX are hurting as they scramble to cover their positions, leaving gaps on the daily chart. If these are exhaustion gaps, as they appear to be, they will be filled sooner rather than later.
Meanwhile, the GDX:$GOLD ratio is rising, indicating that the mining stocks are leading the metal again, which is typical of a strong rally.
With its urgent 50-basis-point cut in the Fed funds rate, the U.S. Federal Reserve may have put the final nail in the coffin of the U.S. dollar. On Thursday, the index came within 2/100ths of a point of its all-time low, 78.43 in 1992 -- the last bulwark against the abyss.
Apres Greenspan, le deluge.
It's taken gold exactly two weeks of urgent buying since its breakout from the 15-month triangle to top the May 2006 peak, intraday. This chart confusingly shows a closing price of $723.70, Tuesday's floor-session close at 1:30 p.m. EDT, but a high of $735.50, which occurred an hour and a half later, after the Federal Reserve board announced a cut of 50 basis points in the Fed funds rate.
The prospect of accelerated inflation -- the nasty side-effect of Ben Bernanke's potent medicine for the stock and bond markets -- pushed the U.S. dollar back into its tailspin and sent gold, among other commodities, higher. Gold remained above $730 at 4 p.m. EDT.
After the briefest of pullbacks, the U.S. dollar index is back outside its falling wedge and at its lowest point in 15 years.
GDX, the gold-mining ETF, shot up out of its brief consolidation and is at its highest level since May 2006.
Neither gold nor the gold-mining stocks has thus far offered an opportunity to join the powerful rally on a significant pullback. One will no doubt come, though as both are far from overbought on a weekly basis, it could be at higher prices.
The indefatigable and ever-insightful Adam Hamilton of Zeal Intelligence has come up with another big-picture analysis -- this time of a repeating pattern in the rise of HUI, the American Exchange's index of unhedged gold stocks.
Hamilton shows that in its bull market to date, HUI has advanced in stepwise fashion, with each surge followed by a period of drifting at a level higher than the previous consolidation. He calculates that the average increase in HUI in each surge has been 136%.
He suggests that we may be in the early stages of a fourth massive upleg, which, if it stays true to form, could take the HUI over 700 -- roughly double its current level -- before next summer.
On Wednesday and Thursday, gold digested its gains from the first week after the breakout, trading in a range between Tuesday's high and low. Several days of backing and filling to accommodate those who didn't have a chance to buy between, say, $700 and $720 could supply a base for an assault on the critical $730 mark.
The daily RSI and MACD indicators are looking overbought, with RSI above 70 and the MACD histogram turning down, so a consolidation would be helpful. Gold could conceivably return to the downtrend line, now offering support at around $685, without harming the bullish case.
On the weekly chart, the RSI and MACD indicators have plenty of room on the upside, suggesting it is early days yet for this rally.
Silver is also consolidating, managing to close right on its 50-day MA.
GDX, the gold-mining ETF, is pausing to fill the gap around $42 from the island top in July (there was another island top in the same area in April). Its rising 50-day MA is poised to cross the now slightly rising 200-day MA.
It is no coincidence that gold is taking a breather just as the U.S. dollar index is bouncing after its sharp decline since the beginning of the month. The dollar's RSI has just risen above 30 after falling briefly below that level. This suggests that the bounce has some way to go. It would be quite normal for the dollar to rise to test its former support, now resistance, around 80.
Now that gold is more than 5% above its downtrend line, few would doubt that the yellow metal has made a legitimate breakout and is on its way to test its May 2006 peak.
Given that gold has essentially shot straight up after breaking out on Sept. 4 and that any pullbacks since then have been mild, intraday ones, we may well see a period of consolidation around the 26-year high at $730.
Silver, after a brief pause at its now rising 50-day MA, has surmounted it. Next resistance is near the downtrend line and 200-day MA at about $13.25.
The gold and silver miners indexed by the GDX exchange-traded fund are also plowing ahead. GDX may be expected to challenge recent highs around $43.
The U.S. dollar index has dropped below recent lows around the psychologically important support level of 80, beneath which lies uncharted territory for the greenback.
The dollar is poised to break down from a year-long falling wedge. As such a formation is usually bullish, a breakdown from it could catch those expecting a reversal to the upside on the wrong foot, adding impetus to the decline. We shall see.
If a breakdown does happen, gold -- which, as the chart shows beautifully, has a habit of moving inversely to the U.S. dollar -- is likely to soar.
Using the method that helped him predict gold's parabolic rise from November 2005 to May 2006, Adrian Douglas of Market Force Analysis has discovered massive buying of options, expiring in December or later, on gold, silver and 15 major gold stocks. The number of calls outstanding far outstrips the number of puts, leading Douglas to conclude that the smart money has positioned itself for a "massive upleg" in the precious metals.
Another analysis by RBC Capital Markets shows that since 1984, in 22 out of the 28 cases when the ratio of the XAU index of gold and silver stocks to the price of gold fell within the current range, a positive return would have been earned by holding those stocks for a year. The average return was 27.3%.
Ross Clark of Institutional Advisors reminds us:
Seasonal Tendencies favor a rally in stocks into September-October. In the past ten years the precious metal indices (XAU, HUI, TSX Gold) have rallied well from July through September-October. A closer analysis shows that the rally from August 17th should take 6 to 7 weeks, providing a time window for a high during the weeks of September 27th to October 5th.
On the other hand, Brian Bloom says he'll remain unconvinced the current rally in gold is the real thing until its price breaks through $715. Until then, he argues, gold runs the risk of forming a bearish double top on the point-and-figure chart. He notes that the price gapped up at the beginning of September and says the probabilities favour a pullback, declaring ominously:
Looking back to 1985 there is not one single gap on the monthly chart that has not been covered in the past 22 years.
After a brief intraday pullback on Wednesday, gold leapt 2% today to close at $704.60, surpassing April's high of $698. It appears that this breakout from the 15-month consolidation has legs. There are no further peaks to surmount before gold tackles May 2006's 26-year high of $730.40.
However, longs taking profits at the $700 round number could supply temporary resistance around this level by obliging those shorts who are urgently covering their positions. A pullback to the breakout point is still possible, though perhaps less likely now. MACD looks strong, but RSI has reached the 70 level, which preceded declines in April and July.
Silver was repelled at its 50-day MA, around $12.66, and some resistance remains overhead.
The fact that silver seems to be falling behind in this rally, as shown by the chart of the gold-to-silver ratio above, must give the gold bulls pause.
This ratio does, however, appear to have found support at its 200-week MA. The weekly MACD histogram may have bottomed out, and RSI appears to be recovering from a brief plunge below 30.
The major gold-mining stocks, as measured by GDX, advanced by 6.4% on good volume, overcoming substantial resistance around $40 and both the 50- and 200-day MAs. MACD, though still below zero, is rising strongly, as is RSI, which is convincingly above 50.
The fact that GDX has begun to rise faster than gold, as shown in the chart of the GDX-to-gold ratio above, is positive for the yellow metal, since in major advances GDX traditionally leads gold.
However, the ratio was halted today at its falling 50-day MA, which lies below its also falling 200-day MA, so a period of consolidation could lie ahead before the rally resumes in earnest.
Gold opened the week and the month of September up $9.60, finally breaking the 15-month downtrend line from its May 2006 high.
On both the weekly and daily charts, price is above both the 50- and 200-period moving averages, which are themselves rising. RSI is above 50 and rising; MACD and its histogram have both crossed over to the upside. All these are signs of strength.
Another is the fact that support at the 200-day MA on the daily chart was tested successfully three times before the breakout from the long triangular consolidation.
Gold could now go straight up to test the May 2006 high at about $730. More likely, however, would be a backtest to the downtrend line, which would now provide support for the yellow metal in its climb.
Silver, meanwhile, has turned up on the weekly chart but faces considerable overhead resistance.Price is stuck between the rising 50- and 200-week MAs, and while the MACD histogram is showing a weak positive divergence, MACD itself is below zero and RSI remains below 50.
On the daily, MACD and its histogram have crossed to the upside, and RSI has broken above 50, both signs of strength. However, price remains below both the 50- and 200-day MAs, which are falling.
If silver stays weak, a sustainable uptrend in gold seems unlikely.
GDX, the gold-miners ETF, has bounced back from what appears to have been a capitulative high-volume day on Aug. 16 to face resistance at its 50-week and 50-day MAs, around $39.
On the weekly, while price is above the rising 200-week MA, and the MACD histogram has turned upward, MACD itself is below zero, and RSI has yet to rise above 50.
On the daily, while MACD and its histogram have crossed to the upside, and RSI is now above 50, the 50-day MA remains below the 200-day and both are falling.
It appears that GDX -- which, like the similarly composed HUI index of unhedged gold miners, is seen as a leading indicator for the gold price -- has work to do.
Gold's rally has been accompanied by a rally in gold stocks, particularly those of the producers. The chart shows that GDX, the gold-miners ETF, has risen relative to gold over the past month.
