Short Term Technical Conditions Deteriorate Further
It is becoming much more difficult to uphold a short term bullish case for the gold sector, as gold stocks stubbornly continue to underperform the metal. The only consolation regarding this point is that they have done exactly the same during the mild correction correction in the gold price during late July/early August, only to rather unexpectedly roar higher again.
Unfortunately however, this time there is a more pronounced MACD sell signal in gold, although gold has as of yet not fallen below the near term support level at $1350. Here is a look at gold's daily chart – as can be seen, the $1,350 level is quite important from a technical perspective, because a support trendline now intersects with lateral support there. The upturn in gold's 50 dma counts as a positive factor:
Gold spot, daily candles – click to enlarge.
On a 30 minute chart of the active December contract we can see that essentially the post payrolls release gain has been given back (this is the situation at the time of writing). This is why we mentioned that the immediate reaction to the report was not necessarily meaningful.
Gold December contract, 30 minute candles – click to enlarge.
Nevertheless, gold itself so far continues to look fine on a daily chart. There is nothing extraordinary about the recent pullback. The same is not true of the gold stocks though, which have so far led the metal's recent decline from the late August high:
The HUI, daily, with obvious technical negatives indicated – click to enlarge.
We should probably not be too surprised, but the HUI index has actually managed to fall all the way to the lower 'standard' (20/2/0) Bollinger band in the recent decline. There was some hope after the August rebound that this habit may have been discarded. Not so. It is actually fairly normal for stock indexes to frequently do that, but due the HUI's volatility, it is traveling quite great distances – the index routinely makes percentage moves in the space of a few days that broader market indexes need weeks or months for:
The HUI has once again traveled all the way from the upper to the lower Bollinger band - click to enlarge.
As a result of all this, the recent slightly positive divergence between the gold price and the HUI-gold ratio has been erased, with the latter declining considerably further:
HUI-gold ratio: back to its falling ways … click to enlarge.
Inflation Expectations
We recently discussed the state of US inflation expectations with a friend from Canadian insider trading specialist INK Research, pointing out something we have previously mentioned in these pages, namely that the 'traditional' comparison between TIPs yields and bond yields may at present be distorted due to the recent pressure on these markets from the unwinding of over-leveraged positions. Since TIPs are not as liquid as nominal bonds, forced selling will affect this market segment more than the other, so it may still take some time before one can fully rely on this spread again.
Our friend pointed out to us that there exists an OECD/EU measure of US inflation expectations that is apparently based on an independent survey these organizations conduct and is published by the St. Louis Fed. A recent chart of this measure shows inflation expectations to be higher than those expressed by yield differentials:
OECD/EU measure of US inflation expectations, survey based – click to enlarge.
We intend to keep an eye on this survey and compare it to future developments in the TIPs/bond yields ratio to see whether it is useful.
Conclusion:
The current pullback could well turn out to be another 'bear trap' similar to the one that occurred in early August, but we must stress that one cannot be certain of that in view of the recent technical deterioration. As can be seen in the uppermost HUI chart, there is a now a rising trendline that connects the previous lows, and it may well hold in this pullback. However, there is also a definitive 'the bear isn't finished yet' level in the form of the late June low. We would actually be inclined to come to that conclusion in the event the trendline fails, especially as turning points in the sector often tend to occur in the October/November time frame if they fail to occur in May. Ideally we are merely witnessing the usual volatility the index tends to exhibit after making medium term lows under very oversold conditions, but we will have to wait and see.
Addendum: September 11
On occasion of the anniversary of the September 11 attack, we want to remember Bill Meehan, with whom we have been in correspondence for several years. Bill worked at Cantor Fitzgerald, the firm that lost more than any other in the attack (658 of its employees, or almost two thirds of its workforce died). Although we never met Bill in person, we considered him a good friend. Bill was a fount of market wisdom and was extremely generous in sharing his knowledge. Talking to him was always interesting and fruitful. Here is a link to a tribute at TSC, and here is Bill's list of 'Instructions for Life'.
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