(click to enlarge)
Comments: What seemed like it might be a retest of the breakout turned instead into an ugly failed breakout with the reversal coming on heavy volume. Although the HUI is still within its uptrend, its RSI uptrend has been broken. Likewise, the XAU broke down out of its triangle on a gap down (the HUI does not show gaps). Volume was generally heavy, which is also not an encouraging sign. Spot Gold is right at its $610 triangle support. Any lower and that will also be a breakdown on that chart as well. Although a bounce early next week may be possible, my guess is would be a bounce that you may want to sell into rather than buy.
Reasons for the Breakdown: The main reason is that gold stock traders got ahead of themselves expecting the usual season September rally in gold. Such rally generally occurs due to physical/jewelry demand around this time. However, there has been no evidence thus far, that there is anything more than spotty physical demand at Gold over $600. The fact that the Iran crisis has coincided with the commencement of the period of stronger jewelry demand may also have hurt gold as it is likely that jewelers may have been reluctant to buy with the Gold price expected to be volatile due to geopolitical tensions.
Does this mean that gold cannot sustain a price over $600? I don't think so. Gold can and will march higher. It is important to note however that we are currently in a demand replacement cycle where physical/jewelry demand for Gold is replaced by investment/currency hedging demand. Until recently, around 80% of Gold demand was related to the jewelry demand. More recently, demand has begun to be increasingly driven by investment demand relating to currency and geopolitical instability. However, such demand is not yet high enough (like it was in the late 1970s) to consistenyly be able to drive the Gold price higher.
The other reason for the ugly reversal is that the USD Index, after trading sideways for a while, has shown some indication that it wants to rally (a patriotic rally going into September 11?). The fundamentals seem lousy for a Dollar rally, so I'm not expecting it to go too far. However, it may well go far enough that it deals a painful blow in the short run to Gold and Gold stocks.
Current PM Portfolio Exposure: 91%
Sentiment: bearish--looking for appropriate exit and expecting an imminent breakdown in the HUI and Gold
Portfolio Gain/Loss for the Week: -4.8%
2 comments:
Your analysis makes a lot of sense to me and as I am also heavily allocated, I have been watching the action with more than a passing interest. One of the characteristics of a bull market is to shake off as many participants as possible. Given that, wouldn't an apparent breakdown at a critical juncture like this be just the thing to take people out of their positions immediately prior to an upturn? If I am wrong about this, next week could be difficult.
Here is something I posted on my own blog which may provide some encouragement. See what you think...
http://the-slow-lane.blogspot.com/2006/09/divergences.html
1. Thanks for your comments! That is a really great blog. I recommend anyone reading this who is interested in investing in metals and natural resources in general to check out the above blog. A lot of information on specific stocks, drill results etc. [http://the-slow-lane.blogspot.com/].
Regarding your comment, or rather the comment from your frined that you posted on your blog, there was definitely a divergence with the miners going up while gold not doing anything in particular. That kind of divergence is often a good indicator of a coming surge. The problem, as you know, is that Gold also needs to confirm in the end, and in this case, Gold couldn't break its own downtrend to confirm the breakout in HUI. And just like that, poof, all the recent gains are gone and then some.
Cheers, - T.
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