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Pater Tenebrarum: Last week prior to the ECB announcement and the US payrolls report, gold and gold stocks drifted lower, as they always do ahead of these events. Until Thursday the relative strength in gold stocks and the price charts of the gold stock indexes themselves hinted at a routine consolidation from a technical perspective.
This changed rather markedly on Friday, when gold once again fell below the $1200 level in a knee-jerk sell-off following the superficially strong payrolls report, which “exceeded expectations”.
The household jobs report was actually far weaker than the payrolls data and the size of the labor force was once again revised lower.
We keep wondering how market participants can make any decisions based on this report, which as a rule is revised out of all recognition over the 12 months following its release. Moreover, employment is a lagging economic indicator anyway. However, things are what they are; since the Federal Reserve’s dual mandate includes an employment component, and the central bank is like a driver doing 200 on a highway while staring fixedly into his rear-view mirror, it is held that even a payrolls report that is only superficially strong will bring the timing of the widely expected rate hike forward. This time not even the otherwise impervious stock market was able to escape that conclusion.
Photo credit: AFP / Getty Imag
In addition, the blow-off move in the US dollar became even more pronounced. We can’t remember too many historical instances of a more crowded trade, and yet, it continues to work – a phenomenon we have observed in currency markets for some time now (extremes in sentiment and positioning data haven’t even managed to slow recent currency trends down a little).
Below we show a few charts illustrating the current situation in detail. While selling in the gold sector has resumed and panic volumes similar to those seen late last year have returned, there are still a number of significant divergences in evidence that may well come to matter going forward. Technically, the sector looks quite vulnerable again, as an important support/resistance level has just given way. This may well lead to a retest of last year’s lows, or even a decline to a lower low. It would obviously be better though if a higher low were put in instead.
Are there any reasons to expect that this may happen? Not necessarily based on the technical condition of the charts of gold stock indexes and ETFs, but various ratios actually point to a sizable improvement in gold mining margins in spite of the weakness in the nominal gold price. This is often the precursor to a better performance of the sector over the medium to longer term – and at the beginning of longer term rally phases a number of divergences between the USD gold price and gold stocks are usually put in over an extended time period (this can be a very drawn out process).
First a look at the HUI and the HUI-gold ratio, both of which illustrate last week’s breakdown:
The HUI daily, plus the HUI-gold ratio. The latter should either show strength (to confirm an uptrend is underway) or at least deliver a positive divergence at lows – click to enlarge.
The next chart shows the gold miners ETF GDX – this serves mainly to illustrate the fact that panic volume has returned to the sector last Friday. Near both the 2008 and 2014 lows, it usually took several days of exceptional volume before a durable reversal occurred, but not all of these high volume trading days were actually down days.
GDX: panic volume is back – click to enlarge.
We still think that the panic volumes seen last year make it likely that this was a significant turning point, but if trading volume becomes even larger in the current move, we would have to revise that view.