The world expects the FOMC to update its expectations regarding a tapering of Treasury bond asset purchases tomorrow. The world thinks that a tapering of these purchases would be bad for gold.
I think a decrease in T bond purchases would be anything from neutral to a potential positive (see post coming later today on the matter). Regardless, it is time to be looking out beyond FOMC with regard to the precious metals, a most sensitive sector to monetary policy.
So here is a check list of what we want to see in order to press the bull stance.
Technicals
At its most basic level a rally is a series of higher highs and higher lows as with the daily chart of HUI above. If this is still intact post-FOMC HUI will be set up for another strong leg higher, given the weekly MACD/TRIX bull signals.
Turning to a quality gold stock*, Royal Gold provides a perfect illustration of what is going on in the gold stocks. The 50 day moving averages, which were preferred support have been lost. This allows people who want to be bearish to claim that the sector is broken. That is not the case, however.
Have the gold stocks made it easy for short term bottom callers? Of course not; it seems like they never do. But the ‘higher low’ parameter comes above another critical support level (green dotted line, equivalent to HUI 217) and as a side note, the 50 MA’s have turned up. RGLD is not broken and the entire correction has been on declining volume. That implies something corrective, not terminal.
The gap could be interpreted as a negative, but that could easily be a ‘break away’ gap because it thrust RGLD above the 50 day averages, implying a trend change. It does not need to be filled any time soon. Recall that we respected the downside gaps on the ‘quality’ leaders in the last NFTRH edition that highlighted individual precious metals stocks (not sure which edition it was off the top of my head, but it was amidst the over bullish euphoria).
I bought RGLD back at the SMA 50. It then declined further but I am not even thinking of selling it unless it breaks critical support.
The HUI-Gold ratio was diverging negatively on the ‘Syria reversal’ day when the miners popped hard and dropped hard, kicking off the current correction. Given HUI’s strict parameter at 217, it is notable that the gold stock index has shown strength relative to gold over the last couple of days. It would be fitting for the miners to have led the correction in the precious metals complex and to also lead the correction’s end.
Macro Fundamentals
Turning to macro factors, the 30 year T bond yield vs. the 2 year is bouncing. All across the curve longer term bonds are out performing shorter term bonds. Gold usually goes in line with yield spreads. So a continuation of this fledgling trend is very important to the fundamental case. This condition would provide the opposite effect as Operation Twist did last year, as it dampened inflation signals.
I have probably not veiled well my negative feelings about many of the people who populate the precious metals analysis world. The other day I read someone talking about how gold failed to rally despite Twist, among other things. I immediately put him in my mental trash bin. A rising curve is gold-positive (Twist pressured the curve), and gold bulls want it to continue to do so off of this short term bottom.
Gold vs. the US stock market is either about to break down or more likely (in my opinion) is preparing to find a bottom. Given the respective sentiment backdrops (getting over bearish in gold and over bullish in stocks) we have a positive risk vs. reward for gold over stocks. Again, the ‘stop loss’ on this thinking is a ‘lower low’.
Gold-Oil (probably the most important component of the ‘real price of gold’ to gold mining fundamentals) has held support and firmed over the last couple of trading days. It is even flirting with the SMA 50.
Counter cyclical gold vs. cyclical industrial metals is unbroken and just fine as of now as it maintains a ‘higher low’.
Bottom Line
I have tried to display restraint because this is FOMC week and associated emotional dynamics should be respected. Taken in a vacuum however, the sum of the above gives me significant feelings of contrarian bullishness. Best of all, if that bullishness proves to be wrong the mental ‘stop loss’ on the analysis is just a teeny below current levels.
In other words, as the precious metals stand now (FOMC hype aside), the risk vs. reward is vastly improved from when we began getting cautious in and around ‘Syria reversal’ day and over bullish sentiment. There are both technical and fundamental reasons to be constructive on the sector.
* I take seriously any and all valid critiques, especially when they come from long time subscribers, which the two noted yesterday are. Upon reflection it seems I may have become so strict about keeping us apart from the precious metals perma bulls, promoters and all around lazy thinkers that it appears as if I have ingrained an over compensation away from analysis that is unafraid to be bullish.
But ladies and gentlemen, I do not think that is the case. The way I go about things is with discipline and honesty (to myself). If I cannot honestly tell myself something I am sure as shootin’ not going to tell it to my customers. This worked well when HUI did something that was technically not right late last year and risk management became THING 1 at all times.
Now we may be transitioning to THING 2, but as I noted during the precious metals bear market, others will get the glory of having called the bottom (after calling several of them). I don’t play that game. I play the game of slow and steady, getting where we are going while always double checking and verifying.
There is someone out there who called bottom, bottom, bottom, bottom all the way down and now calls a manipulated bear attack in the precious metals possibly at the precise time that people should be bullish (risk vs. reward). It makes dynamic headlines but personally I don’t see how people can live like that. Slow and steady my friends and yes, we will get to technical analysis on QUALITY precious metals stocks when appropriate, which I hope is soon. :-)
