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Week in Review===
[GOLD must hold 1,167.30 (January low) to avoid very bearish potentials.]
In the last eLetter dated 2.27.15 we outlined an extremely over bullish situation in the US stock market, a relative bullish view of Europe vs. US and a bounce in the precious metals. The US stock market (and global stocks) may have begun a correction on Friday, but confirmation will be needed this week.
As for the precious metals, HUI began having problems early last week and we noted to subscribers in a pre-market update on Wednesday that GDX/HUI had made bearish signals as they sagged to and just below the 50 day moving averages.
On Friday we found out exactly what the problem was to be as the US employment data for February came in strong. This week NFTRH 333 looked closely at the ‘Jobs’ report and had some interesting findings. But it proved to be a right cross to the jaw of the already wobbling (and counter cyclical) gold sector. Here is a premium excerpt on the precious metals from NFTRH 333, bringing the volatile situation up to date:
Precious Metals
Let’s start with the seemingly ignominious stuff this week, given that short-term yields are rising nominally, rising in relation to long-term yields and those conditions are antagonistic to gold. Assuming the economy remains strong, the Fed dutifully hikes interest rates, and the economy and stock markets hold up, the bear market for gold would be likely to continue unabated.
So the question is, are those things going to happen as anticipated by a majority of participants? It could be, but I’ll ask you to think back to 2007. Who had it right and who had it utterly wrong? The fringe comprised of lunatics including your letter writer had it right in the big picture view, that the inflation fueled boom was going to end in a bust. The majority had it flat out wrong.
I do not present a chart like the one on page 5 [edit: from an earlier segment in the report, but included at the end of this excerpt] because I want to be a bear, a doom & gloomer or a member of any fringe “community”. It sucks to be those guys these days. I do the chart because it is the chart and my interpretation of the chart is what it is [edit: ultimately bearish and downright dangerous considering the 6+ years of unabated policy stimulation]. If my interpretation of the chart were not so negative in the big picture I would not be interested in gold. Period.
That said, in the ‘pricing’ casino gold got blown up again on positive economic data just as it should have when strong economic signals come in against a deflationary backdrop (let’s put aside for now all those creeping cost increases that are seeping into the economy). The weakness we noted on Wednesday foretold Friday’s damage.
What was positive last week? Well, the gold rally ended with a thud; and that was the positive event. Had gold (and the miners) rallied during the goofy trade show known as PDAC, and had the Commitments of Traders data above turned in the other direction in sympathy as speculated upon in this post (Gold CoT Improving, but…http://nftrh.com/2015/02/28/gold-cot-improving-but/) it would have drawn out the bearishness because the CoT had not finished its improvement trend.
After Friday’s $30 drop on good volumes, it is not difficult to imagine that the CoT is now approaching a favorable zone. Remember, the short-term bear phase will not end until CoT completes its trend of moving in a positive direction. So a resumed rally last week would have actually been unwelcome from this standpoint.
But we have been noting that gold (per the Stockcharts.com ‘spot’ chart) must hold 1,167.30 (January low) to avoid very bearish potentials. On Friday spot swung as low as 1,162.90 and closed the week at 1,168.20. Talk about pushing the limits.
Silver’s key January low was 15.51 and on Friday it swung to 15.74 before closing at 15.93. As a side note, Silver’s CoT continued on its improvement trend, much like gold.
HUI is doing the worst case scenario (within a still intact bottoming potential), where it will need to make a higher low to December. The shaded area is where the index resided when we reviewed the warning signs in pre-market on Wednesday using GDX.
We have noted that HUI can drop to the 160’s and even the 150’s while still keeping a rally or bear market bottom scenario alive, arduous though it may be. If this grinding process proves to have been an important bottom one day the resulting bull market would be a hum dinger because it will have sprung from nerves tattered for years on end.
Of course the other scenario is that the US economy holds up just fine for an indefinite period (as the economy ‘services’ itself), European QE begins to manifest in persistent economic strength (it is already showing signs as we have noted), gold goes to Martin Armstrong’s level somewhere in the 600’s and the miners, right out of business in many cases. I’ll take ‘Economic Contraction’ for a million, Alex?
Because nothing at all has changed. Time will not go as we may wish. It will go as it goes. But the thesis continues to be that a [economic] contraction scenario was put into gear when the US dollar began to rise last summer. Sure enough, some creeping signs of US deceleration are appearing. Now, can the Fed continue to baffle us with b/s forever or will we start to put 2+2 together if the economy weakens and come to a conclusion that there never were going to be any rate hikes? After all, if there weren’t any after 6+ years and 2 solid years into an expansion, when the hell will they be?
The point is that gold needs short-term interest rates to stop rising (and the bond market to stop taking the Fed seriously and by extension, confidence to start to wane) and more to the point it needs short-term rates to stop rising in relation to long-term rates. Further, gold needs to firm and turn up vs. the stock market.
These are the holdout fundamentals we have been strictly working to in calling the entirety of the fundamental backdrop “not yet baked”. I am not desperate to get exposed to the sector because of a long-term gold holding that is not for trading. What I am is patient in waiting for opportunities to speculate, both short and long-term.
<end NFTRH 333 excerpt>
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