lunes, 31 de agosto de 2015

lunes, agosto 31, 2015

Gold Bulls Win A Battle, But The War Rages On
             
Summary
  • Gold broke through a key resistance level at $1162 last week, and now has the chance to rally higher over the next month or so.
  • Sentiment towards gold is starting to reach an extreme in terms of demand for the commodity, declining credit ratings towards the bigger mining companies, and trader positioning.
  • Key support for the next week or two lies at $1133 - $1142.
'Off with his head' come the cries from the gallery! Not a great couple of weeks for us bears in the gold (NYSEARCA:GLD) market, as we have now broken through the $1162 resistance level I noted as being important for gold to remain in an impulsive decline, and we should now expect renewed calls for the bear market low to be in place.

In my last article I gave the key levels to watch as being $1077 and $1105, with a break below/above acting as a signal for what would unfold. Despite my gut feeling that we would move lower, instead we broke above the $1105 resistance level and quickly moved higher towards next resistance at $1130, before marching higher as the markets went into freefall mode over the next week, and closing at $1160 on Friday.

Since key overhead resistance has now been broken, we have opened the door to a bigger rally higher, but I will warn you now not to get too excited as I am firmly of the opinion that the final low for gold has not yet been seen. Bulls may have won a battle, but the war rages on. The question now is how high can the rally take us?

Markets in Meltdown Mode Spur Safe Haven Buying

The chatter on the investing blogs is of course all about the brutal declines in the broad US markets over the last week. No sector emerged unscathed as fears of a slowdown in China, coupled with a declining Dollar and lingering doubts about the timing of the first rate hike by the Federal Reserve, gave investors ample reason to scale back on their US stock holdings.

Like most things in investing the rule is often but not always, and in terms of the gold to stock market correlation it is evident that often when the stock markets drops we see gold catch a bid.

This time the correlation played out well, and with the stock market failing to kick on higher at the same time gold made new lows, a bit of mean reversion has taken place.

The media are once again throwing around unfathomable figures in terms of the notional value rubbed out in the global markets - $14 Trillion dollars apparently - and the table below emphasizes the depth and scale of the decline as shown via performance in US markets:

(click to enlarge)
*source - authors own research via stockcharts.com

I did not include it in the list, but the popular safe haven of 20+ year bonds (NYSEARCA:TLT) made a weekly gain of only 1.97% (although I should point out it was well above its lowest point of the week by Friday), and the gold miners made only 6% - quite an interesting statistic given that gold itself made gains of over 4%, and illustrating that when the market panics there isn't really anywhere for investors to hide.

With volatility comes opportunity and although the declines have been sharp we are likely to be closer to a swing low than many expect, so we may see a decent bounce in the next week or two and thus diminish gold's safe haven appeal. It was certainly noticeable that gold failed to rally higher when the markets moved substantially lower on Friday, so if we break down through upper support in gold over the next week we may well see a bigger pull back at the very least.

However, I am not sure that the downside in equities is completely over just yet and we may see a renewed drop in the share markets over the next month, perhaps after a relief rally, meaning gold may catch a renewed bid after this pull back completes. What I am sure about is markets are a little temperamental at present, and in times like these it is hard to make calls with great conviction, so instead I will just be playing it by ear and watching the support and resistance zones for clues.

Sentiment is Reaching an Extreme

The sentiment towards gold can be measured in a number of ways, but of course the biggest and most pertinent is the demand for the commodity as measured by sales. Over the last two weeks the World Gold Council has published figures showing that demand from 'Chindia' dropped to 915 tonnes in the second quarter, a decline of 12% from the same period last year and new 6 year lows.

Other measurements include the way analysts and rating agencies view gold producers, and while many have recently upgraded some of the gold miners in terms of their expectation for a bounce in share prices, the ratings agency Moodys downgraded Barrick Gold's (NYSE:ABX) credit rating to Baa3 - the lowest investment grade level, and basically just a stepping stone away from junk.

This is perhaps a sign of the times with respect to gold producers and I do not believe that Barrick will be the only one to receive a ratings downgrade by the time the bear concludes.

Ultimately this is the kind of thing happens when a beaten down sector is approaching its lowest point, and while I am not of the opinion that gold has put in a bear market low, we are starting to reach a place where it just can't get much worse for companies within the sector.

We often find that the worst news accompanies the true low, as sellers have anticipated what the outlook may be in advance and have taken action (sold) prior to the official announcement of whatever is was they feared may happen. In this case Barrick's share price has already dropped 61% from August 2014 and investors have sold the rumor. Perhaps in the next 6 months we should be buying the news.

Another key measure is how speculators have positioned in terms of their bets towards a commodity versus the market makers (the commercial trader category), with an extreme position in terms of long or short contracts held often marking important trend changes. When everyone piles over to one side of the boat the opposite side tends to rise, so one of the key measures to look for will be the speculator category having a huge net short position in gold, something we are starting to see in the small speculator category, but have definitely not seen yet in the important large Speculator group.

Data Points

COT

The latest figures from the Commitment of Traders report are below:

(click to enlarge)

If the figures this week seem a little tame in comparison to the price move in gold, don't forget that they detail changes to positioning up until last Tuesday. At that point gold traded at $1110 per oz, and it has moved 5% higher since.

We can see that the small speculators have built quite a decent net short position, and the large speculators continue to favor bullish bets on the whole. As I mentioned above we want to see this category get considerably net short at the bear market low, but over the last couple of months they have dumped a huge amount of long contracts and added many short, so a little bounce should probably have been expected.

Looking at the table and the chart below, and given the rise in price over the last 4 trading days, I think we can expect to see a big change to the large speculator positioning when next week's report is released. They are likely to have chased price with the purchase of long contracts and the sale of short contracts. However, when this overall position becomes too biased to the long side we will see price top and decline again, likely to new lows.

(click to enlarge)
*source: OANDA

GOFO

Backwardation remains in place for gold at relatively high levels, and suggests a continuing scarcity of the physical metal for sale. That may indicate more of a reduction in commercial hedging activities since demand fell considerably in the second quarter, but the overall effect is the same in that it puts a bit of a cushion under the gold price.

Interestingly we are starting to see divergence between gold and silver in that backwardation levels for silver dropped with this latest bounce higher, and silver then failed to rally as high as gold in relative terms.

If the gold price drops to new lows once this rally completes, and producers decide they need to increase their hedging activities, backwardation may fall away and with it the persistent bid under the price.

US DOLLAR

When the dollar index (NYSEARCA:UUP) failed to move much above the 98 level in recent weeks we soon spotted that a decline may take place. I have been advising our Trader's Lounge members that a short play could yield good rewards, and price has obliged with a strong move lower in the last couple of weeks.

The drop in the dollar can be attributed to two things - a perception in the markets that the Federal Reserve will not raise rates this year; and weakness in the equity markets resulting in foreign investors selling US holdings (although one feeds the other, and we can perhaps attribute the equity market decline to investors fearing currency depreciation).

Looking at the daily chart we can see that we are well on our way to the ideal target range of 90.7-93.3, and although it is possible to drop as low as the mid 89s, I believe the dollar will make a low in that range and start to move higher - in fact I am expecting new highs once this decline is over.

(click to enlarge)

MINERS

The major gold miners index (NYSEARCA:GDX) made a weekly gain, but as mentioned above did not make as much as you would expect to see given the rise in the gold price, and declined just under 3% on Friday when the broad market selling intensified.

(click to enlarge)

Assess the rally in November, and you will see that our first move took us to the 50 Day Moving Average before we pulled back a little, and the bulk of the rally then took place taking us up to test the 200DMA. If gold holds support and starts to rally higher over the next week or so, GDX should hold above the low/mid 14s before starting to move higher towards a target that could easily be in the 18-19 range. All eyes on gold for clues.

GOLD

Gold has now broken above the $1162 level I cited as being important if we were to maintain an impulsive decline to our bear market low. We have now opened the door to a bigger rally, but of course gold still has to walk through it.

Looking at the weekly chart first, we can see that the rallies have tended to be capped between the 50 & 200 week moving averages, so that gives us a target range in the $1200-1280 price range, although my feeling is we will not get above $1230 if the rally continues.

(click to enlarge)

Zooming in to the 4 hour chart, as long as we can hold support in the $1133-1142 range, we can easily see a push higher with our next target resistance zone being $1177-1188. At each resistance level we will need to assess how price reacts, but assuming we retrace correctively from that level we can push to higher targets in the $1200-1230 range, and so on.

(click to enlarge)

If we break the key support at $1133-1142 over the next week or so, and then proceed to break lower than $1109, the chances are good that the high is in place and we will decline to new lows.

Support: $1133-1142 ($1109 at worst)

Resistance: $1177-1188; $1200-1230 ($1280 at best)

As usual I wish you all good luck for the coming week!

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