Commodity Trade Mantra
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No Clear Trend In Gold and Gold Stocks Yet

No Clear Trend In Gold and Gold Stocks Yet

No Clear Trend In Gold and Gold Stocks Yet

They’re Keeping Us in Suspense …

Thursday’s small pullback was no big deal after the big rise on Wednesday, but the quadruple-witching day on Friday saw gold stocks surrender what was left of Wednesday’s large gain (gold held on to less than half of it). This was certainly a disappointment, as the shallow uptrend line that the market seemed to have successfully defended is coming into view again. It is probably better if it isn’t touched a forth time in such close temporal proximity, as that will make it very likely that it breaks. In that case, we’d be back to having to expect a retest or even an undercutting of the late June low.

However, the pullback looks actually quite similar in character to the one seen at the beginning of the rally in late June/early July. It is hard to say to what extent Friday’s action may have been related to the expiration, but if there is a connection, then perhaps the pullback was worsened by it. One reason to suspect so is that net money flows into GDX remained strongly positive for the week.

HUI, daily annot

The HUI, daily – a lower high has been put in, but there are similarities to the pullback from the initial burst higher in early July – click to enlarge.

What illustrates the similarity best is actually trading volume – for which we use GDX as a proxy. Note that some 25% to 30% of the large volume in gold stocks on Friday has to be attributed to quarterly ETF and index rebalancing trades shortly after the close, in other words, ‘real’ directional volume was a great deal lower than total volume.


GDX: volume on initial rallies stronger than on pullbacks – click to enlarge.

Gold Surrenders $1,350 Level Again

Here is a 30 minute chart of the December gold contract: on Friday, a large part, but not all, of Wednesday’s rally was surrendered. Support was found near a previous short term high that was put in on Monday and Tuesday.

Gold, 30 min., one week

Gold, December contract, 30 minute candles – click to enlarge.

Gold has surrendered the $1,350 short term bull/bear demarcation again in the process, but a secondary level of support has held. Below is a daily continuation chart with all the lateral support and resistance levels drawn in:

Gold, continuous contract daily

Gold, continuous contract, daily. The area defined by the two blue lines is to our mind an important secondary support level. It would not be unusual if the 1,350 level needed more than one crossing before it is surpassed for good. However, strong resistance awaits at 1430 as well – click to enlarge.

The Dollar Looks Weak

Meanwhile, gold’s main antagonist in the world of paper currencies continues to look technically weak, in spite of a very vocal bullish consensus, constantly repeated by sell-side analysts. Obviously, none of them have looked at money supply growth. The idea is that ‘relative economic strength’ will translate into a stronger exchange rate, but this idea is deeply flawed. If this were true, the yen would have been weak for many years, but it has on the contrary been quite strong, because money supply growth in Japan has been very slow.

Similar deliberations can be applied to the dollar-euro exchange rate: US money supply growth is consistently larger than euro area money supply growth. When US bank lending shrinks to zero year-on-year, it is almost certain that euro area bank lending will turn negative. And lastly, the Fed buys enough securities from non-banks to create quite large and likely permanent additions to the money supply, something the ECB does not accomplish to a similar extent. Therefore, regardless of the US economy’s relative strength in terms of economic aggregates (which are rather meaningless as indicators of economic health anyway), the important point remains that more dollars than euros are ‘printed’. Here is a weekly chart of the dollar index, which is largely a reflection of the dollar-euro exchange rate (the euro has a 60% weighting in the index). We regard it as ‘neutral with a bearish slant’ from a technical perspective:


DXY, weekly. As long as it remains within or above the congestion zone delimited by the red dotted lines, it may be called ‘neutral’ rather then bearish, but in terms of the uptrend line from 2011, the 40 and 10 week moving averages (roughly equivalent to 200 and 50 day ma) and the MACD, the dollar index at least exhibits a bearish slant technically speaking – click to enlarge.


A clear short term trend has yet to emerge in the gold sector. At present, the bears still win as many battles as the bulls, but eventually a breakout from the recent area of congestion will occur. Even if it is to the upside, it may still be preceded by a retest of this year’s lows – one cannot tell for sure yet. To our mind the bullish case would be better served if that can be avoided, as ‘retests’ sometimes become breaks. Recent large inflows into GDX and high trading volume on significant rally days are keeping hope alive with regard to that.



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