kitco.com (interesting charts)
WHAT DOES THIS DIVERGENCE MEAN?
By Chris Temple, The National Investor
December 24, 2003
Wednesday, December 24, 2003
As we approach the end of 2003 (where did it go!?) we can look back on a very successful year for most gold investors. As I write this, the price of gold is still up around the $410 per ounce level, holding quite nicely at its highest levels since early 1996, and up roughly 20% for the year.
Gold stocks—as they generally do over broad moves—have multiplied gold’s returns by an extraordinary amount. Even after the recent nasty correction, the Amex Gold Bugs Index (HUI) is still better than 50% higher than it was back in January. Even the less flashy Philadelphia Exchange’s Gold and Silver Index (XAU) is up by a nice 33% or so.
Though both gold itself as well as the shares of gold mining companies moved up pretty much in sync since the latest surge began in earnest back in mid-Summer, the month of December has been decidedly different. The spot price of gold has continued to churn a little higher, up (as of this morning) by about $10.00 per ounce. Gold mining shares, though, have been a different story. Punctuated by a nasty plunge at the beginning of the month, they are now off on average by more than 10%, with a number of individual issues down as much as 25%. In fact, it appears as though the only thing that has saved gold shares from a far worse drubbing—so far, anyway—has been the metal’s continued rise.
Let’s talk about gold first. As you see here, the metal’s move higher has actually accelerated since the beginning of November. Even the $400.00 per ounce threshold—which I had expected to provide stiffer, albeit temporary, resistance—has been breached fairly easily.
The primary—if not, lately, the exclusive—driver for gold has been the weakness in the U.S. dollar, seemingly invited by both the Bush Administration and the Federal Reserve. The U.S. Dollar Index has declined further over the last couple months, from a level around 93 down to 88, as the greenback sets one new low after another against the euro in particular.
As they have for much of this move, hedge funds and other short-term traders have had an easy time playing these two trends against one another. As the dollar’s decline is shrugged off by its custodians as “orderly,” more dollar selling has become a virtually guaranteed outcome; and as that continues, gold can only benefit.
The metal, though, has been unable over the last couple weeks to match the greenback’s sell-off; one sign that it remains temporarily overbought. Overhead resistance has become apparent each time that gold has pushed much above $410.00. Yet, due largely to the dollar’s continuing doldrums as well as the market’s appropriate perception that the longer-term trend for the world’s reserve currency remains down, sell-offs in gold have been muted. This has set gold up for one of two things, as its trading range narrows rapidly: either a break above the $412.00 level to mount an assault on its 1996 highs of around $420.00, or an overdue correction.
Gold shares have worked their way as well into a situation where a sharp move either up or down may well occur shortly. As you see, the downtrend from their peak at the beginning of December remains in tact. At the same time, this has pushed the sector—measured here by the HUI—down against its ascending 50-day moving average. This level has proven to be magnificent support since it was last broken (and only temporarily) this past Summer. Yesterday it was broken briefly, though the closely watched proxy for the sector did manage to close fractionally above its support as the day ended.
In the grand scheme of things, there is nothing necessarily unusual about this recent divergence between gold and gold shares. As I told subscribers almost a month ago in recommending they cut back their allocation to the sector at its most recent peak, gold shares had simply become overvalued; in some individual cases, obscenely so.
This was one of the warning signs that we picked up on—the increasing propensity for investors over the last few months to bid up darn near any company with an exposure to gold, for little reason other than it was being heavily touted by one or more pundits, and/or was simply rising in price.
I’ve watched a couple of these “darlings” with amazement of late; companies with little or no attraction either fundamentally or economically, but whose share prices nevertheless soared before getting some recent comeuppance. When investors buying gold shares begin to act as giddy (and irresponsibly) as those throwing money at tech shares for no other reason than that they’re rising, it generally means that at least a near-term top is at hand.
As for the sector generally, one of my favorite barometers with which to measure the level of gold shares against gold is this chart from the Sharelynx Gold web site, at sharelynx.com (by the way, if you’ve never visited Nick Laird’s Australia-based web site, you’re not only missing a treat, but a site which has far and away the biggest encyclopedia of charts, history and other goodies of any precious metals-related site I’ve seen.)
As you see here, as gold’s bull market began in 2001, the ratio between the HUI and the gold price has moved higher. This is natural; and I have no doubt that, as the bull market extends itself in the months and years ahead, the ratio will continue to move up.
But as with market moves of all kinds, nothing ever goes up (or down) in a straight line forever. There have been three distinct instances where the ratio was expanding so quickly as to obviously mean that gold shares were racing ahead too quickly: those were the Spring of 2001, the more pronounced interim peak for gold shares in mid-2002 and the most recent peak. All three were prudent areas to sell off at least part of one’s allocation to gold shares.
Even more impressive has been this ratio’s signals as to when it was best and safest to reverse course and load up on gold stocks again. Those instances are highlighted conspicuously here. Each time, the ratio between gold and gold shares had completed a correction/consolidation move, and had broken technically to the up side. I continue to believe we’ve entered another consolidation period for gold stocks relative to gold, one which must play itself out before the next period comes when it will be appropriate to “back up the truck and buy” once more.
May you each have a VERY Merry Christmas, and continued prosperity and good fortune as we enter 2004!
sharelynx.com
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