Where will the gold correction bring us?

Where will the gold correction bring us? ... and which signals are miners and stock markets giving?

The summer minimum

Demand for gold for jewelry tends to ease during summer. Jewelry producers and  mints allow for their staff to take a summer break. Unless there is any other pent up demand, gold prices are usually weaker during summer.

Miners index (HUI) to gold regression impaired.

The linear regression between the HUI miners index and the gold price which was valid since Aug 2018, has come under severe strain since last summer. Permanently negative residuals are a clear statistical indication that the linear relationship is seriously impaired.

Oversold miners; Lagging gold

The yellow metal peaked in August 2020 at an all time high, with miners following in the slip stream. While little over one year later, gold is less than 15% off its peak, miners are oversold and lagging gold.

Gold miners regain their regression trend line

Since the summer of 2018, the HUI gold miners index has been following a regression trend line relative to gold. The emerging trend was first described in September 2019 and confirmed last year.

A case for the 'white precious metals'

The precious metal recovery in January last year was led by gold, with the white precious metals - especially silver and platinum - following reluctantly. The idea of a more sluggish growth in China translated into expectations of lower demand for industrial metals. In January 2016, copper quoted at a decade low. 

Sluggish East-Asian economies keep the lid on precious metals

From September until the end of the year is repeated over and over to be the seasonally strongest period of the year for precious metals. Such statistics however are averages and calculated standard errors are considerable. Yet we now face the fifth consecutive year with precious metals unable to uphold any gain during autumn. A worsening economic outlook for East-Asian economies keeps the lid on precious metals.

Gold miners: three decades for naught

The Philadelphia gold and silver mining index (ticker symbol XAU) has been around since Jan 19, 1979, initiated at 100 with gold quoting $230.5. Fast forward to 2015 January 22: Gold topped $1302 (after the long anticipated QE-bazooka by the ECB), while the XAU closed at 81.12. Even though revenues per ounce are more than fivefold higher, the mining index lost 18.88% in 36 years.

The volatile NYSE Arca Gold Bugs Index (HUI)

Since a couple of years, precious metal miners are the absolute dogs of the stock market. Every recovery we enjoyed has rolled over, followed by an even deeper trough than the previous bear market bottom. Even before gold peaked in August 2011, miners had been lagging the rising price of the metal.

Relative strength of gold prices

There are plenty of technical indicators working very well for a short time frames: RSI, MACD ...
However when it comes to determining the relative strength over the long haul of the gold price, or that of any other precious metal or commodity, it is more useful to compare to the average of the preceding period. In the following article, a simple moving average over 250 days is chosen, since that generally coincides with the number of trading days in a year.
Graphs last updated on Oct 21, 2016

Their last trump card...

The current circumstances in the precious metals markets are remarkably similar to those on June 27 and 28 of 2013.

1. Gold put down a new low since the 2014 recovery faltered. But the yellow metal is cutting its intraday loss towards the close.
2. Gold is playing it solo: though platinum group metals followed in the plunge, their recovery was swift and Palladium reversed to the positive, while platinum is breaking even by 4 pm and seems to evolve to a positive close.
3. Silver reluctantly follows gold, but never was down more than a couple of cents.

Failure of a rigging scheme (?)

The majority of traders in precious metals futures probably aren't the geniuses the outside world takes them for. They do have more and better market information and statistics and consistently apply those sources of information, with the algorithms implemented on their trading platforms. They continue adding to their personal -or their company's- profits until proven wrong.

Nearing the end of a major pull-back ?

Any major trend reversal never comes without any hick-up, questioning the reversal. Throughout the gold-miner bear market we have seen quite a few false recoveries, which were merely decent exit points allowing investors to mitigate their loss. In every occasion worse was to come. The major pull-back we faced in the second half of March is one of those key-events questioning the emerging trend. Anybody doubting the reversal should have sold by mid-March, the believers were and still are offered an opportunity to add to their positions.

Gold price volatility: Real swing still to come...

The below graph shows the price of gold since the start of 2008, gold was about to break above $1000/oz for the first time in history. We all more or less remember what was to follow, but human memory is selective and often narrows down to the more recent events. Apart from the price of gold (in blue using the left axis), a second graph in red (using the right axis) shows an annualized measure of gold price volatility. It wants to tell a story...

Brutal end of a nascent gold miner recovery

We 've witnessed a nascent precious metal miner recovery since June 27, as miners have started recovering even before gold found its final bottom below $1200 in the morning of June 28. For as long as the stealth gold rally had legs, miners responded favorably. The gold rally was petering out the week after last posting:
The stealth gold recovery rally. Gold has been sliding from July 29 onwards. Despite a small technical recovery last Friday, the gold slide aggravates. Whenever there is some rumor out about "tapering" the QE3/QE4 bond purchase programs of the FED, hell breaks loose.

The stealth gold recovery rally

Ever since bottoming in the morning of June 28, gold has been hesitantly drifting higher. The short first week of July, with American and Canadian exchanges closed for the national day, the yellow metal lingered on, apparently challenging its June 28 bottom. Gold closed the short week down 1%, however without closing below $1200. Ever since we seem to experience a stealth gold recovery rally. Until this morning, $1300 seemed to be a firm resistance for gold. After a few failed attempts, we're now vigorously steaming up higher.

Sudden swoons are the fate of precious metal prices

The future casino

The futures volume traded exceeds the trade of physical products manifold. This often is the case for soft commodities, crude and non-ferro metals. Yet precious metals really trump all. Many on-line trading platforms don’t even allow any physical settlement, reducing a future contract to a bet on the future price. Describing a gold future transaction as "a promise to sell by a party who hasn't got the precious metal to a buyer who hasn't got the cash" is hardly exaggerating.

The slump in precious metal miners

Havoc during the financial crisis 

Before the 2008 financial crisis and as late as March 08, when gold peaked above $1000 for the first time ever, the popular HUI index of unhedged gold miners quoted above 500. The ratio HUI/Gold had been in a trading range between 0.4 and 0.6 for several years. This seemed to be a dynamic equilibrium. Forced liquidations during the financial crisis caused a near 30% retreat for gold, bringing the price down to around $725 (not counting intraday lows). This meant carnage for the gold miners, which fell off a cliff, with the HUI plunging from 515 (March 14) to 152 (Oct 27). The HUI/Gold ratio plunged from 0.51 to 0.21 between those two dates.

Waarom gaan de goud- en zilverprijs plots onderuit?

Het future casino

Het volume aan termijncontracten (futures) overtreft vele malen de fysieke handel van producent tot verbruiker. Dit is zo voor graanproducten en sommige non-ferro metalen, maar goud en zilver spannen waarschijnlijk wel de kroon. Verschillende on-line handelsplatformen laten zelfs geen fysieke afhandeling toe, zodat een termijncontract de facto altijd neerkomt op een gok op de toekomstige prijs.

Bij het aankopen van een goudfuture, wordt van koper en verkoper een bepaalde beginmarge gevraagd, zodat beiden daardoor aan het contract gebonden zijn. Daalt de goudprijs, dan zal de koper van de ‘future’ zijn marge moeten verhogen. Stijgt de goudprijs, dan wordt aan de verkoper een extra marge gevraagd.

Een koper die een beginmarge van bijvoorbeeld 5% betaalt, waarna de goudprijs 10% stijgt vóór de datum van afwikkeling (settlement), heeft op dat moment zijn beginkapitaal verdrievoudigd. Wie fysiek goud gekocht heeft, noteert gewoon een winst van 10%.

Indien de goudprijs 10% zou dalen, dan wordt aan de koper gevraagd om 10% van de contractwaarde bij te storten, het dubbel van zijn initiële marge, waardoor hij dus 300% verlies noteert. De koper van fysiek goud, noteert gewoon een koersverlies van 10%.

De hefboom bij termijncontracten maakt van de handel in edelmetalen een echt casino. Dit brengt mee dat een hoge volatiliteit inherent is aan de termijnhandel.

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?