NFTRH; Gold Sector

The following is an email from subscriber Francisco.  I thought I would use it as a basis for an update on gold and the miners today (with his permission).  I’ve numbered the points being addressed from his email…

Hello Gary,

“You are probably working on something already, but I wanted to get your thoughts on today’s move on the metals [1]. I get the feeling this is about to accelerate to the downside as opposed to bounce. I have a great hedge going on JDST. Got in under $12 and the $20 level looks like a great target to close it out. However, since it is a hedge to my current miners positions, I am planning to hold it. The JDST looks toppy, but the miners look like they are breaking down with further to go [2].

Interesting market to say the least. I was also wondering about the $1000 target for gold [3]. I only have time to read a handful of analysts. I can’t gage the mainstream’s view on $1000. It just seems too obvious to me. Either gold turns around very soon (before getting to $1000 and leaving everyone waiting behind) or it needs to break $1000 to scare everyone out. I was wondering what is your feel for that target based on mainstream sentiment.”

  1. I was actually not working on an update because today is within the favored scenario, which has been to get a flush over with sooner rather than later.  Using our weekly charts gold has been almost a given to get to 1180 at least.  Today it has not even dropped quite that low.  So I have not wanted to work you over with important sounding updates (i.e. noise) when things are as we left them in both the weekly letter and the ETF update earlier in the week.  Yet here we are.  :-)
  2. I would say that JDST is over bought as opposed to toppy.  Over bought is momentum and as with the miners’ downside and USD’s upside, momentum can stay that way for long periods and even lead to a crash or upside blow off.  I too hold JDST but am thinking of selling it, as I am also very light on miner positions.  The reason is that with gold near the 1180 target and the miners not yet below the December 2013 lows, there is always the possibility of a bounce.  With the deeply over sold conditions a bounce could be furious.   For me, I’d rather hold nothing, long or short as stated so often in the notes section at the end of the weekly letters.
  3. Yes, gold looks like it’s got a magnet at 1000 +/-, but sentiment and CoT data are now so in despair and bullishly aligned respectively, that again I just want to be in mostly cash (while playing around with the stock market’s ups and downs) and await some signals.  A hard rally could very well come about off the December lows (1180 in gold, 188 HUI).  Gold hit 1190 today and HUI is at 189.  The SIL ETF hit a new low today and silver is obviously well along in utter breakdown mode.

My view continues to be to let it play out and not be a hero.  Certainly I think Francisco’s idea of holding JDST as a hedge is a sound one for those holding miners.  There are people out there holding it as a straight up play and to them I say have a ball.  For me, risk averse as usual, I’ll probably sell it today and then wait until this extreme in the metals either manifests in a bounce or a crash from over sold levels.

If it is the former, a potentially strong rally might be a ‘sell’ if the macro is not in line at such time.  If it is the latter, the view remains that whatever bottom comes off of the crash would probably be a very important one.  Cash or hedging is oh so important folks, until the situation clears.

Personally, I have no need to dedicate to the gold sector until given a combination of macro fundamental and technical and sentiment based reasons.  One thing I find interesting this week is the mostly opposing action of the gold sector and the regular stock market.  So if the market fixes itself (it has not yet) then that might hurt the precious metals bounce case.  If the market takes another leg down, gold may be set up to zoom up off of this deplorable sentiment backdrop.

The above is part of why I had not been planning an update.  Too talky!  Have patience, perspective and most of all, balance!  See you Sunday with #311 unless something really notable happens this after noon.