Gold market has bottomed

January 2011 brought about a severe correction in the gold market. After the steep rally that ended on a multiple top and a new all time high in USD during December 2010, the new year started with a gradual slide, acerbating on news of a small hedge fund having overplayed its hand on a long/short calendar spread in gold futures: traders typically need a lead to follow the gold market lower. The greenback has been weakening since the beginning of the year, putting aside the inverse correlation between the gold price and the USD exchange rate. Main stream press also pointed to significant drops in the holdings of GLD, the major gold backed ETF. So, is this gold price correction about to end soon?

Anatomie van een herstelrally

In de schaduw van de steraandelen opereert op Euronext Brussel de fixingmarkt, waar ondermeer vastgoedcertificaten verhandeld worden met één enkele dagnotering, gevormd om 15:00. Het is een markt waar nieuws schaars is en elke hint in een persbericht belangrijk kan zijn.

Vastgoedcertificaten eindigen 2010 op een valse noot

De BRECS (Belgian Real Estate Certificates) return index heeft 2010 afgesloten op een valse noot, nadat eerder in December het 62500 niveau overschreden werd. Veel had te maken met een flinke uischuiver van Beaulieulaan, het enige kantoorcertificaat dat een behoorlijk indexgewicht heeft. Bij een volume van meer dan 500 stuks ging het certificaat op 23 december €11.5 lager op €162. Dit was een nieuw historisch minimum, terwijl er eigenlijk geen nieuws te rapen viel: het opschorten van de verkoopprocedure dateert al van 21 september. Een mislukte herstelrally bracht ons daarna tot €172 om gisteren terug te vallen tot €163.

Did you say leverage?

A myth often heard is that precious metal miners offer a good leverage over the price of the metals. With precious metals rising the PM miners see their cash flow multiply at constant mining costs. I'm not digging into why this isn't always the case, I just show some evidence rising when comparing the HUI index to Gold.

HUI relative to Gold

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Both graphs below show the HUI (basket of unhedged gold miners), relative to the continuous contract price of gold. High values mean miners are relatively more expensive.

daily (6 months) chart, click to enlarge

Weekly (3 years) chart, click to enlarge. The 200 moving average refers to 200 weeks or close to 4 years. The HUI:Gold ratio consistently stays below its 200 weeks moving average and is about to drop below its 50 weeks moving average. 

We saw excellent gold rallies over the past six months with gold strengthening by $200/Oz between mid July and end December. Gold mining earnings being leveraged to the price level of their output, you could expect a stellar performance of the HUI, with an increase of the HUI:Gold ratio. In the midst of the rallies this indeed worked out.

However, over the short term (graph over a 6 months lapse, daily observations) you'll notice the HUI turning weaker relative to gold during any correction, amplifying the decline of Gold. There is some support at the 0.37 level. We're still above that one. The HUI/Gold ratio dropped below its 50 days moving average (dma). It's about to drop below the 200 dma if weakness continues today. We find pull backs towards a support for the HUI:Gold ratio, despite stronger gold prices. (top graph)

A round-up

Best wishes for 2011.

I started this blog back in November 2009. Initially I mainly intended to keep track of valuable postings that otherwise would get lost and snowed under on different forums.

Ambition grew over time as I realized I slowly gathered an audience. This isn’t evident, considering that the blog is bilingual and initially most postings were written in Dutch for a local public. I’m not posting on highly popular or controversial topics either: asset classes less covered by mainstream media.

There’s more blogs covering mainly gold or related assets (you find them in the right side margin). The more popular ones mainly convey a political message criticizing monetary policy and/or gold price manipulation.