Sentiment for the yellow metal is very weak

CHAPEL HILL, NC (MarketWatch) — The gold-market timers I track aren’t exhibiting the extreme pessimism and despair that is the hallmark of a bottom in prices, despite a dismal six-week period for the yellow metal.

Over the past month and a half, the March Comex gold contract has fallen by more than $100 — from a high of $1,307 on Jan. 22 to a low of $1,195 earlier this week. It’s currently just above $1,200. In fact, bullion is now back to within shouting distance of its late-December low.

Nevertheless, the average recommended exposure among gold timers I monitor is nowhere near as low as where it was during those December lows. And that’s not a good sign, according to contrarian analysis.

The current average recommended exposure level (as represented by the Hulbert Gold Newsletter Sentiment Index, or HGNSI) stands at 0% — indicating that the average gold timer monitored by the Hulbert Financial Digest is completely in cash. At the late-December lows, in contrast, the HGNSI stood at minus 46.9%, which meant that, at that time, the average gold timer was allocating nearly half of his gold-trading portfolio to going short, betting on a decline.

That represented a very aggressive bet that gold was headed lower, and in true contrarian fashion, the gold market quickly responded by rallying: Bullion rose by more than $100 an ounce over the following four weeks.

Unfortunately, as you can see from the accompanying chart, the HGNSI is a lot higher today than in late December. As a result, the current gold market rests on a markedly weaker foundation of sentiment than it did then.

What’s it going to take to create that strong foundation? Contrarians typically don’t speculate. It could happen quickly if many gold timers decide in coming sessions to throw in the towel. It would take longer if the gold timers stubbornly stick on to their relative bullishness.

We’ll know soon enough.

In the meantime, don’t forget that contrarian analysis applies primarily to the short term, and thus sheds little light on gold’s longer-term prospects. Gold could easily be much higher at the end of this year, for example. But, if so, and if contrarian analysis is right, bullions’s path to that higher level will take it lower first.

Click here to inquire about subscriptions to the Hulbert Sentiment Indexes.

Methinks the continued persistence of the entire speculative crowd (Hedge Funds, Large Reportables and the General Public) in remaining on the long side of the gold market must be due to excessive exposure to the plethora of gold perma-bull websites. There really is no way to explain this in my view as the charts are quite clear and have been for some time now.

Larger Image

Here is the Daily Chart: Three support levels have given way as if they did not even exist. Gold did bounce off of the support level shown near $1170-$1165 but the bounce looks feeble and more of a “let’s book some profits before the weekend” kind of pop rather than any sign of strong, concerted buying.

Let me take a moment here to express my utter disdain at the charlatans in the gold cult who are once again out making more excuses for their pathetic predictions of soaring gold prices, etc., By now you know the usual drill – make fearless (and idiotic) predictions of “this is it”; “gold to soar”; “Chinese and Indian buying to take gold to new highs”, blah, blah and more blah. When gold drops lower and their useless predictions are found to be vapid, they trot out the usual “this is official sector selling of the gold market to suppress the price”, drivel.

Let’s be honest here – these quacks no more know what gold is going to do next than my dog does. Yet for some bizarre reason, which I still am unable to comprehend, in spite of a treasure trove of failed predictions, the naïve gold cult devotees still put these people on some sort of pedestal and dote upon every phrase and sentence coming out of their mouths as if they are the modern version of the Oracle at Delphi.

Reader – if you are one of their victims, WAKE UP. The charts will tell you what you need to know and right now, the charts, as they have been doing for some time now, say, the price is headed lower.

Larger Image

I have noted the relationship that has developed between gold and the Ten Year Treasury futures contract since October of last year. Both markets are moving in sync. As the Ten Year futures moves lower, (interest rates rise), gold sinks. It is really that simple. No manipulation BS, no “official sector selling”, No, “evil bullion banks slamming gold”, No, “gold cartel takedown”, ad nauseaum, ad infinitum.

Gold is simply another asset class that competes for precious investment capital allocation by investors. It pays no yield, throws off no dividend nor earns interest of any sort and therefore MUST HAVE FEAR, and lots of it, to produce any gains for its holder. With investor confidence growing in regards to the overall global economy, gold is seeing both liquidation from disaffected longs as well as short selling by those who believe it is going to lose even more fans throughout the remainder of the year. There is nothing the least bit sinister about this.

Larger Image

Back to the chart – the ADX line has resumed its higher move after a brief interruption occurred the last week of February. That indicates the downtrending move is back in force until proven otherwise. The -DMI is strongly above the +DMI, showing the bears in control of the market.

The next support zone lies down near the $1142-$1140 level. For the bulls to have any chance of turning this around technically, they would have to clear $1230.

In looking at this week’s COT data and chart, one can see that the hedge funds still remain large net longs in this market. Even more interesting is that the category of speculators, “Other Large Reportables”, actually had increased the size of their net long position over the past reporting period. OUCH!

Larger Image

The small speculators began bailing out of the long side and adding some new short positions but still remain net long. Remember, this is through Tuesday of this week. I am very sure that the number of their long positions was cut considerably after today!

Larger Image

One thing I am also noting is the price level at which the entire group of speculators began to rebuild their long positions in the gold market. Look at the above chart and note the green outlined ellipses.

During the month of November last year, specs began coming back into gold in decent size. They increased their long side exposure by the equivalent of nearly 107,000 futures and options positions at their peak exposure the last week of January this year. It was that buying which took the price to up near $1300.

That recent low point in their total long positions also happens to correspond to the $1167 level on the closing gold price chart. As of today’s close, every single one of those new long positions that remain (38,000 or so), are underwater. Think about that! Now the question is, how much pain can those that remain handle? Again, some of that remaining 38,000 longs were obliterated today but I am sure a lot more still remain.

This is the reason why the support levels on the chart are now going to be very important. Below $1140, I do not see any support until the contract low near $1130. If the former level were to give way, the latter will certainly be tested. At that point, depending on the other external markets (interest rates, currencies and equities), gold may very well take out $1130. If it does, watch for a huge number of longs to throw in the towel which will provide some hefty selling pressure.

Time will tell…

This analysis covers the long term charts of gold, gold mining shares represented by the HUI Gold Bugs Index and the world’s largest gold producer, Goldcorp.

Let’s commence with the gold price.

Gold

Gold has been trading as expected in recent times but there has been something in the back of my mind that has been niggling me. That is the long term chart. While I have been feeling in rhythm with gold for quite some time now, I have kept the focus on the shorter term picture. However, now it is time to confront the issue.

Let’s get straight to it with the yearly chart.

Gold Yearly Chart

In previous analysis, I drew a Voodoo candle which called for a spike down to below US$1000 before a big reversal

higher which closed out 2015 near its highs. This was assuming the 2014 candle would be a slightly positive candle. Well, my timing has been a little off and the 2014 candle turned out slightly bearish.

I can be quite finicky with how I like the picture to look and this change in “look” has been the thing that has been bothering me. However, I have turned a blind eye to it as I focused solely on the shorter term picture. Not anymore.

Let’s cover the lower indicators first.

The Relative Strength Indicator (RSI) set a new high reading at the 2011 price high. This leads me to believe that the ultimate top is yet to be seen. I would like to see a bearish divergence set up which would require a new price high accompanied by a lower RSI reading.

The RSI is trending down but it is still in positive territory so it would not surprise this indicator if price turned back up soon and went to new all time highs. Something to keep in mind.

The Stochastic indicator is trending down and looking bearish. Once again, it wouldn’t surprise to see this indicator turn back up but it is bearish until it’s bullish.

The Moving Average Convergence Divergence (MACD) indicator has made a recent bearish crossover so the likelihood is for lower prices.

So, the lower indicators all appear fairly bearish and that is the bias we must have going forward until there are clear signals to think differently.

There looks to be a massive “three strikes and you’re out” top formation in play with the 1980 high the first strike and the 2011 high the third strike. So I definitely do not think the massive bull market is finished.

I have added the trusty Parabolic Stop and Reverse (PSAR) indicator. There are two sets of dots which pertain to a tight setting PSAR and a loose setting PSAR. Price has already busted the tight setting support so the sirens have gone off on my early warning system. The probability now is for price to eventually go on and bust the dots of the loose setting support. These dots stand at US$1000.

And herein lies my dilemma. I was looking for a move to sub US$1000 as I view that as an important psychological barrier that needs to be cracked. However, price cracking this barrier means cracking important PSAR support which would increase greatly the odds of lower prices.

Perhaps price pulls up above the loose PSAR support and the next bull trend begins from there. Perhaps, but I don’t favour that scenario. I’m going with the probability play which is the busting of tight setting PSAR support being a true early indication of the loose setting support inevitably being taken out.

So how low do I expect the gold price to trade?

I have drawn a Fibonacci Fan with price currently just above the 61.8% angle. There has been some support here and I expect the next 76.4% angle to also provide support. However, I think the final low will be somewhere down near the 88.6% angle.

I have added Fibonacci retracement levels of the move up from 2001 low at US$255 to the all time high in 2011 at US$1920. Previously, I used the 2008 level as the starting point. That was probably due to my bullish fundamental mindset not thinking a move to below the 2008 lows was possible. Well, I should know better. Anything and everything is possible in the markets!

Old highs often provide support in the future and I expect the 1980 high at US$873 to provide temporary support. However, I suspect the 1987 high at US$502 will be closer to the mark for final low.

Now I have been a massive fundamental gold bull all the way down from the high and I will continue to be so all the way down to the final low. Nothing changes there for me. However, my technical view always trumps my fundamental view and I remain a technical gold bear.

I am now looking for a low at the 76.4% level which stands at US$648 and possibly a touch lower. I doubt price will trade as low as the 88.6% level at US$444.

What about the 50% of the all time high price level? Yes, I will still be looking closely at the price action around that US$960 level but a final low there is now not my expectation.

Also, the famed Jim Rogers, who freely admits he’s not a good trader, has recently come out saying he expects a move back to the 50% level. Whoa! Hold the phone!! So Jim, who openly admits he’s not a good trader, is now entering the trading arena calling for a low around the 50% level. Well, byjingoes! That 50% level is already getting too much attention so I believe it is suspect and the gold price will ultimately fall much lower. While I’m with Jim on the fundamentals, I’ll go my own way on the technicals.

NYSE Arca Gold Bugs Index (HUI)

The NYSE Arca Gold BUGS Index (HUI) is an index of gold mining companies with the BUGS standing for Basket of Unhedged Gold Stocks and is listed on the American Stock Exchange (AMEX). Price last traded at $180.21.

We’ll start with the monthly chart.

HUI Monthly Chart

There is a “three strikes and you’re out” low formation in place denoted by the numbers 1, 2 and 3. This normally leads to a significant rise in price and I expect this rally is still playing out.

The most recent low was accompanied by multiple bullish divergences in the lower indicators being the RSI, Stochastic and MACD. This generally leads to a more substantial rally than we have witnessed so far.

The Parabolic Stop and Reverse (PSAR), indicator has a bullish bias after price busted the dots on the upside back in January.

The Bollinger Bands show price is now just below the middle band and I would like to see the final rally high come in around the upper band.

In a bearish development, the 100 period moving average (red) has just made a bearish crossover of the 50 period moving average (blue). Yet more bearish forces at work.

I have drawn a horizontal line which denotes the 2008 low at $150.56. The recent low at $146 sets up a double bottom and considering double bottoms generally don’t end trends, price should eventually come back down and bust below this level.

Also, I have drawn an Andrew’s Pitchfork which shows price trending down within the upper channel. Price looks to be finding support at the middle channel line and I suspect the final low, whenever that is, will be at this support line.

So where do I expect the final low to be?

Let’s go to the big picture yearly chart in an attempt to answer that.

HUI Yearly Chart

The RSI is in weak territory while the Stochastic indicator is trending down and looking bearish with no sign of turning back up yet. There is not a lot to be pleased about here if you are a bull.

The Parabolic Stop and Reverse (PSAR) indicator has a bearish bias with the dots above bias so the coast is clear on the downside, so to speak.

To my eye, it looks like a massive 5 point broadening top is in play with the 2008 high point 1, the 2008 low point 2 and the 2011 high point 3. That means price is currently making its way to a point 4 low after which price launches higher to new all time highs and eventually puts in a point 5 high.

So where is the point 4 low likely to be?

I have added Bollinger Bands which show the middle band has failed to provide support for price. Therefore, I believe the final low will be around the lower band and perhaps trade a bit below just as the 2011 high traded a bit above the upper band.

In previous analysis, I used Fibonacci retracement levels using the 2000 low at $35.31 as the starting point. I am now having second thoughts about this believing the assumption that new record lows weren’t possible being too presumptive.

I suspect price can nudge marginally below the 2000 low and that is where the final low will be. Of course I will still be watching how price behaves before that, especially around the 88.6% Fibonacci level which stands at $104.08 but it is now my stance that the final low will make marginally record lows.

And as always, it is just my opinion!

Let’s finish up by analysing the gold behemoth, Goldcorp.

Goldcorp (GG)

Goldcorp Inc (GG) is a low cost gold producer with operations and development projects located throughout the Americas. It is the Big Daddy of the gold world and is listed on the New York Stock Exchange (NYSE) with a market capitalisation of around $17billion. Price last traded at $20.51.

Let’s begin with the yearly chart.

GG Yearly Chart

The Relative Strength Indicator (RSI) is looking weak while the Stochastic indicator is trending down bearishly. Nothing for the bulls to get excited about here.

The Parabolic Stop and Reverse (PSAR) indicator has a bearish bias after price busted the dots on the downside last year.

There looks to be a massive 5 point broadening top in play with the 2008 top point 1, the 2008 low point 2 and the 2011 high point 3. That means price is now headed for the point 4 low.

Where is the final low likely to be?

I have added Fibonacci retracement levels of the move up from 1999 low at $2.31 to the 2011 high at $56.31. I struggle to believe price will get so smashed that new lows are made but it must be given consideration. For now, I am looking for price to make a low around the 88.6% level which stands at $8.47.

And once the low is in place, wherever that may be, price should then launch to all time highs as it searches for a point 5 high.

Let’s move on to the monthly chart.

GG Monthly Chart

There is a “three strikes and you’re out” low formation in place which is denoted by the number 1, 2 and 3.

The lower indicators, the RSI, Stochastic and Moving Average Convergence Divergence (MACD), are all showing multiple bullish divergences at this recent low and I expect a more substantial rally than we have so far seen in response to that.

The PSAR indicator has a bearish bias with the dots over price but I suspect a pattern of dots being busted every which way is occurring which is an indication of corrective price behaviour. The dots are currently at $26.18 and I expect price to take them out.

I have drawn two trend lines which form a downtrend channel and I am looking for the final rally high to be at resistance given from the top of the channel.

I have added moving averages with time periods of 50 (blue) and 100 (red) and we can see they are just now making a bearish crossover. And this is the monthly chart so it is a solid indication of a downtrend in progress.

After the coming rally high I expect price to get crunched and fall to new lows. There will probably be a reaction off the 2008 low level which stands at $13.84 and is denoted by the horizontal line. After a brief reaction higher, price should then break down below the lower trend line as the downtrend gains momentum.

Disclosure: I have no financial interest in GG.

Summary

Finally, to touch on the psychology of the gold market, there still appear way too many market participants and commentators that are bullish gold and expect this year to see in the final low. This was giving me a major case of the heebie-jeebies recently as I had the same outlook. It is pretty hard to find any analysis that is more than a little bearish and I now feel much more comfortable being against the overwhelming majority opinion.

Summing up, I expect deflationary forces to really pick up later this year and gold will not be spared despite the opinion of the masses.

And once this deflationary cycle has caused maximum damage to the bank accounts and psyche of the gold bulls, the long awaited boom should see the gold price explode higher as inflationary euphoria finally takes hold.

The world needs gold, says AlphaStox’s Etienne Moshevich, and while it has been out of favor for the last few years, a series of macro factors point to its uptrend. In this interview with The Gold Report, Moshevich discusses 11 gold, manganese and graphite companies with management teams that have the skills to ride the wave to create shareholder value.

Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at their current levels, which means that we are effectively keeping some gains locked and at the same time we’re allowing the profits to increase.

Gold stocks erased the gains of the previous days during yesterday’s session alone and gold declined visibly as well. Is their and gold’s rally over?

It’s quite likely, but the more important thing is that even if they rally some more here, they are not likely to rally much more and lower prices are likely to be seen in the coming weeks anyway.

Let’s start today’s analysis with the gold market (chart courtesy of http://stockcharts.com

Larger Image

Our previous comments on gold from the long-term perspective remain up-to-date:

Gold ended the week below the declining red dashed resistance line and the trend remains down – there were no changes based on Thursday’s and Friday’s small moves higher.

Keeping this in mind, let’s take a look at the short-term gold chart.

Larger Image

In yesterday’s alert we commented on the above chart in the following way:

Please note that we are not ruling out a more visible corrective upswing at this point. The retracement levels based on this month’s decline are marked in green. The first retracement is at about $1,235, so even if gold moves to this level, it will not change anything. In fact, even gold moving to $1,262 would still be viewed as an upward correction at this time (we don’t think that it will move as high, though).

Regardless of the possible upward correction (based on today’s pre-market action, it’s already taking place), it seems that keeping the short position intact is still justified from the risk/reward perspective. The reason is that we are after major sell signals and breakdowns and a possible move back above the previously broken levels would need to be confirmed before having bullish implications. The correction could end quickly and be followed by a big slide (say $1+ decline in silver) that one would not be able to take advantage of by being out of the market. The breakdowns and medium-term sell signals justify preparing for the above while enduring small upswings.

The above remains up-to-date. Please note that gold indeed moved higher, but didn’t invalidate anything – it remains below both resistance lines and the outlook remains bearish.

We saw a repeat of Thursday’s action on Friday as gold once again moved higher, didn’t rise above the upper of the rising resistance lines, and closed very close to the lower one. The volume was also similar – and rather low – on both days. The implications are also similar – and bearish. The current small move higher seems to be nothing more than a correction after a quite visible decline that we saw in February.

Gold declined once again after reaching the upper of the resistance lines. The volume was higher than during the previous days’ upswings, so the price-volume implications are bearish.

If we consider the gold to USD Index ratio, we have just seen a breakdown below the 2014 lows and the ratio seems to be on its way to its target level. The implications are bearish.

Larger Image

Meanwhile, all that we wrote regarding the above silver chart previously remains up-to-date:

Meanwhile, the situation in the silver market didn’t change at all yesterday. Silver is after an important breakdown and it’s likely to decline in the following days or weeks. Please note that the fact that silver didn’t decline yet is not a sign of strength. It’s the natural way of silver to react – it very often either moves very sharply or stays in the same place for an extended time. Based on the recent breakdown, it seems that the next move will be to the downside.

Larger Image

Silver remains below the rising short-term resistance line and the declining long-term resistance line. Consequently, the outlook remains bearish.

Larger Image

Meanwhile, we wrote the following about the HUI Index:

(…) it seems that this decline is not over and that miners have further to fall. Gold is moving higher in today’s pre-market trading, so the odds are that HUI will move back above its 2013 low. This will not have profoundly bullish implications, though. The key declining resistance line is currently at about 200, so the odds are that even if gold stocks move higher, they will not move above this level.

The above remains up-to-date. We saw some strength and we could even see some more, but it would not invalidate the bearish outlook unless we see a confirmed breakout above the declining resistance line (which seems unlikely).

There’s one more chart that we would like to share with you today. It features the gold stocks’ performance relative to other stocks.

The above little-followed ratio has bearish implications for the precious metals market. As long as gold stocks are likely to underperform other stocks, gold will be likely to decline. The former is the case right now as the gold stocks to the general stock market ratio remains in a major downtrend.

Overall, we can summarize the situation in the precious metals market in the same way as we did previously:

Summing up, while we are already seeing some kind of corrective upswing, it doesn’t seem to be justified from the risk/reward perspective to adjust the current profitable positions. The profits may get smaller temporarily, but the odds are that they will become even greater as the medium-term trends remain down and the medium-term sell signals remain in place.

To summarize:

Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks with the following stop-loss orders and initial (!) target prices:

Gold: initial target level: $1,180; stop-loss: $1,254, initial target level for the DGLD ETN: $75.23; stop loss for the DGLD ETN $63.16

Silver: initial target level: $15.70; stop-loss: $17.63, initial target level for the DSLV ETN: $66.25; stop loss for DSLV ETN $45.40

Mining stocks (price levels for the GDX ETN): initial target level: $18.40; stop-loss: $22.17, initial target level for the DUST ETN: $18.99; stop loss for the DUST ETN $11.32

In case one wants to bet on lower junior mining stocks’ prices, here are the stop-loss details and initial target prices:

GDXJ: initial target level: $23.37; stop-loss: $28.37
JDST: initial target level: $12.30; stop-loss: $7.00

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

Thank you.