Thursday, September 5, 2013

A Look at Gold and Gold Stocks Ahead of the August Payrolls Report

by Pater Tenebrarum

Gold, Short and Long Term

The odd behavior of gold and gold stocks last week was ascribed to the Syria related news backdrop and as far as we can tell, that has continued so far this week. We are actually increasingly doubtful regarding that idea. The markets are surely not particularly worried over whether or not a few cruise missiles are lobbed in Assad's general direction from a safe distance. A more likely explanation, at least for this week's action, is anticipation of the August payrolls report on Friday. Given that the payrolls report is considered to weigh heavily in the Fed's decision making, gold and gold stocks are almost always jittery ahead of it.

However, let us briefly recall the last two jobs reports. Both were objectively on the strong side, even if the July report was a slight 'miss' relative to expectations. The June report was undeniably strong, and gold fell right on the day of the release only to quickly turn around again. The July report was preceded by very strong ISM data and while gold held up well on the day of the payrolls report, it weakened shortly thereafter before turning up again. The important thing is though that two fairly strong jobs reports proved unable to stop the rally.

Our working assumption continues to be that the uptrend in gold has further to go, although there is still a small but non-zero probability that the rally from the late June low will turn out to be a 5-3-5 type A-B-C correction. The main reason for thinking that this is a low probability interpretation is that sentiment remains subdued, while the market at the same time 'feels' strong, as dips lately tend to elicit new buying fairly quickly. If so, then the market should not be derailed by news, regardless of whether they are superficially held to be bullish or bearish. A strong payrolls report on Friday will likely lead to a short term sell-off, but in that case we would expect the strong lateral support near the $1,350 level to hold. Lately gold has meandered around just below the $1,425 resistance level, which should give way if the positive seasonal tendencies continue to dominate the trend.

Below is a chart mapping out two possible near term bullish paths for gold. Which one is more likely to be the correct one will probably depend on how the jobs report is received in the short term; the difference between the two alternatives is largely cosmetic though. Keep in mind, this is always assuming that the bullish trend indeed does remain intact. A break of the $1,350 level would bring this assumption into doubt.


Gold, daily: assuming the bullish trend persists, the projection in blue would be the path most likely to be taken if the payrolls report is strong, and the projection in red if it is weak – click to enlarge.

gold seasonal

Note the area in the red quadrangle on the 30 year seasonal gold chart – this is where we currently are – click to enlarge.

In an e-mail exchange our friend and occasional contributor of Elliott wave counts, B.A., remarked to us that if the June low in gold turns out to have  indeed been the low of the cyclical bear market from the 2011 peak, then gold is likely to rise for a while for no discernible reason, just as it has done after every major low since the year 2000. The reasons will only become apparent at a later stage. These initial advances tend to be quite volatile and raggedy, so one must be mentally prepared for frequent setbacks.

Gold Stocks – The HUI- Gold Ratio May Just Have Put in a Higher Low

Gold stocks have been neither particularly strong nor particularly weak so far this week, following last week's hefty correction. There are a few positive short term developments in evidence though. The 20 dma which has crossed bullishly above the 50 dma continues to rise, and the 50 dma has now also begun to turn up. RSI has spent more time above the 50 level than below it over the past few weeks, and the HUI-gold ratio looks like it may finally have put in a significant higher low. However, there is also an MACD sell signal on the daily chart that may be a precursor of a re-test of the 50 dma (most likely to occur if the payrolls data are indeed strong).

HUI-daily-annHUI, daily chart – this doesn't look too bad actually, in spite of last week's bout of weakness – click to enlarge.

HUI-Gold ratio

The HUI-gold ratio with support and resistance levels. A higher low may finally have been put in – click to enlarge.

The GDM's bullish percent index is just above the 55 level, which means that over 55% of the stocks in the index are currently on a point & figure buy signal:

$BPGDMThe bullish percent index of the GDM – click to enlarge.

Finally, a 15 minute chart of the HUI shows that while basically no headway was made this week, the index has also been quite resilient on down days for gold. On Wednesday, the index had a strong close after being down earlier, with gold down over $20 on the day:

HUI-15-minThe HUI, 15 minute chart – click to enlarge.


Technically there is no reason as of yet to doubt that the recent uptrend in the sector will continue. We remain in a seasonally strong period, and in spite of the slight concern the wobble in gold stocks relative to gold last week has produced, everything seems aligned for a continuation of the rally. A little bit more downside volatility cannot be ruled out in the short term, but as long as gold remains above the $1,350 level and the HUI above its 50 dma, the sector looks technically in good shape.

Addendum – Silver in Several Currencies

B.A. also pointed the following long term charts out to us, which show the price of silver in five major currencies. The bear market can actually be seen as a  declining wedge or falling flag formation in this long term time frame. That actually doesn't look too bad either, although the caveat is that wedges can sometimes become seemingly interminable. Also, silver has yet to achieve a breakout from these formations.

silver in various currencies

The price of silver in several major currencies: the euro, the US dollar, the British pound, the Australian dollar and the yen – click to enlarge.

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