Q:HUI/XAU Rally Sustainable ?
A: Follow The Leaders.
35-40 HUI Points seemingly - matters not; as there still seems to be a large measure of disbelief, skepticism and naysaying concerning the ability of Goldstocks to sustain their Rally from the bottom formation off of this recent mass-capitulation in Goldstocks.
Sentiment amongst Individual Goldstock Investors is not much different than that found amongst the Professional Gold Pundits per Ido's Linked Post below, from Marketwatch's Peter Brimelow:
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Is GLD as good as gold?
By Peter Brimelow, MarketWatch
Last Update: 1:09 PM ET June 27, 2005
NEW YORK (MarketWatch) -- Gold grinds on -- but a new gold vehicle has the newsletters quarrelling.
Bullion finished last week above $440, after exceptional volume, reflecting an extraordinary clash between buyers and sellers.
The Hulbert Gold Newsletter Sentiment Index (HGNSI), which represents the average exposure to the gold market among a subset of short-term gold timing, remained at 43% on Friday night, as it had been the previous week.
This represents a sharp swing from negative 30% in April, although bullion itself is less than $20 higher. Mark Hulbert says that, on a contrary opinion basis, this is "at best neutral."
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Hulbert says Sentiment is at best - neutral; but it still appears pretty BEARISH to me.
Tradingwise, I've always believed that to gleen an accurate "state of the state of Goldstocks" - one must review the 4 Main Components to assessing that state.
Those 4 Components being:
1. The FUNDAMENTALS underlying Gold.
2. The VALUATION metrics for Goldstocks.
3. The TECHNICAL picture for both Gold the metal & the stocks and their corresponding convergence/divergence.
4. SENTIMENT - amongst Individual Investors, Institutional Investors and the Market Pundits/Analysts.
It's always been my belief that all 4 components are intrinsicaly interwoven and that no singular component can effectively be used on its own; all though at various points within a given Gold Cycle, any singular component can become a dominant indicator and trading catalyst.
1.FUNDAMENTALLY for Gold:
Globally, we've had massive Fiat & Commodity Inflation, we have staggering US Deficits that only look to grow ever larger in the coming years, the TIC is falling below US Trade Deficit numbers, Gold is emerging to new highs in Multiple Currencies - not the least being the proverbial Safest of All Safe Havens - The Swiss Franc... we have falling Global Mining Production/Output, a Market Environment of low combined returns from Stocks & Bonds, Substantial Market & Geopolitical Risk and vis a vie the historic Oil:Gold ratio - we have ramping Oil Prices with Gold being now historically cheap to Oil, we've seen an explosion in Debt, Credit and DERIVATIVE Levels, we're seeing the emergence of the Low/Middle Socioeconomic Classes within India & China - both having a Culturally supported long history of physical Gold & Silver accumulation, we have Central Banks ahead of Schedule on their Washington Agreement Sales, we have the US ramping pressure for China to Re-Peg the Yuan which will lower the USD...and of course - Gold remains the ultimate "clean credit" carrying no one elses obligation, or promise to pay ~ along with a History supporting its durability as MONEY that is exponential of that of Fiat Currency.
2. VALUATIONwise for Goldtocks:
The recent capitulation saw both the XAU & HUI reach exteme divergent levels from GOLD. Those extreme divergence levels alone - have nearly always led to substantial Rallies in Goldstocks. Significantly; many Emerging Producer Junior/Explorers (along with some of the Majors) reached extremely attractive levels on many valuation metrics such as MC/PP - $/Oz:
mineweb.iac.iafrica.com
Stocks such as GRZ, DROOY, GBN, GBU, CLG,HMY,MFN,KRY,NGX,AUY,MRB,GFI & LIHRY reached deep asset value levels.
3. TECHNICALS:
Put 100 Technicians into a room and show them the same Chart...and you'll get 98 different opinions...
One of the most supportive "technicals" during this recent capitulation/selloff was the extreme level of divergence between the XAU & HUI to GOLD.
Individual Traders have their favorite indicators, or methodology. As usual we saw a vast array of technical opinions from every technical school of thought - from The Elliott Wavers to the Point & Figure afficianado's. It seems that those Traders most Technically oriented were the ones who either failed to participate, are still on the sidelines waiting for HUI 120-150, or have already sold into the bounces, or upon the retracements here of late.
I've always felt that the most significant mistake the Technically oriented traders make, is waiting too long for a "move" to be confirmed and in sectors like the HUI - the bottoms are usually of a "V" nature and it is very easy to miss substantial moves.
4. SENTIMENT:
Here on Silicon Investor we've seen most of the Goldstock oriented threads fall off of the SI "Hot Topic" Lists... that along with the individual investor sentiment and what we've seen from the Professional Gold Pundits & Newsletter Writers as reflected in Peter Brimelow's Article quoted above... certainly confirms that Sentiment was as equally washed out, as were shareprices for Goldstocks.
In general, I think we've seen too much reliance on "reacting" vs. "anticipating" this move being sustainable for the Goldstocks.
In all Trading Decisions... some degree of anticipation of the future is necessary...and given the sentiment environment that still exists 30-40 HUI points up off of the bottom here... it's time to look for guidance from one other very significant barometer of Rally sustainability:
"THE LEADERS"
To quantify the sustainability component of any Rally, I always like to look for leadership and to - the Leaders in a given sector.
But, first - let's take a look at the Chart for Gold:
stockcharts.com[h,a]daclyyay[df][pb50!b200!f][vc60][iut!Ub14!La12,26,9]&pref=G
The 3 Year Chart shows Gold still strongly within a Bullish Uptrend.
While the 50 dma for Gold is slightly below it's 200 dma, Gold is still above both and is only %5 off of its 52 week High ! (that bit of information is seemingly lost on most goldbulls)...and let's not forget that on the rally leg that ultimately took Gold to it's High; we have the 50 dma dip below the 200 dma...form a strong bottom base off of a descending triangle and launch to new highs.
- a similar pattern is developing presently.
The next question vis a vie the "sustainability" for this Rally in Goldstocks - is do we have Leadership ?
We now have a broad spectrum of many stocks Goldstocks, from the Majors like ABX, to the Goldbug Fav's like GG, MDG & GG, to Royalty Play RGLD, to the South African's like HMY, to LIHRY of Papua New Guinea, to the South American Plays like KRY & GRZ, to Juniors like AUY, or MNG - all finally over both their 50 & 200 dma, or right at those levels...such as:
Let's take a look Chart-wise at how individual stocks have come out of the recent bottom formation... I like to look for strong accumulation:distribution and money flow strength coming out of bottoms:
Meridian - MDG:
stockcharts.com[h,a]daclyyay[da][pb50!b200!f][vc60][iut!Lf!Lc]&pref=G
Goldcorp - GG:
stockcharts.com[h,a]daclyyay[da][pb50!b200!f][vc60][iut!Lf!Lc]&pref=G
- Lihr - LIHRY:
stockcharts.com[h,a]daclyyay[da][pb50!b200!f][vc60][iut!Lf!Lc]&pref=G
- Gold Resv - GRZ:
stockcharts.com[h,a]daclyyay[da][pb50!b200!f][vc60][iut!Lf!Lc]&pref=G
- Yamana - AUY:
stockcharts.com[h,a]daclyyay[da][pb50!b200!f][vc60][iut!Lf!Lc]&pref=G
- Miramar - MNG:
stockcharts.com[h,a]daclyyay[da][pb50!b200!f][vc60][iut!Lf!Lc]&pref=G
...do we have "LEADERSHIP" ?
- I think we do and once again - Gold is above it's 50 & 200 dma and is ONLY 5%ish off of its HIGHS !
Gold only 5% off it its cycle Highs and you'd think we were back below $300 POG from the Sentiment levels !?!?!
re: Anticipation... we're entering both the end of the Month and a Quarter... and there are still those "forces" who would like to pound both Gold & Goldstocks down a bit more into the close of this Quarter.
Always keep mental stops...but, don't get shaken out.
Not unusual to see a 50%ish pullback on interim rally legs. 1/2 way from the 165 bottom to the 204ish top is HUI 184ish.
So monitor those levels accordingly.
I still see an environment to be - on, long & strong the Goldstocks.
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