The following are some excerpts from a commentary that appeared on our site Treasure Chests prior to several failed rally attempts in the precious metal complex.
With the prospects of actually raising rates out of the question for the Fed in reality at present, from not only a politically appropriate protocol perspective, but also because of the relatively languid condition in the so called 'economic recovery', it has been reduced to the series of word games we witness with each successive meeting. The new key terminology is 'measured moves', which as you know is a prominent tool in technical analysis, so let's take a look at what the charts now have to say since the anticipated bounce in the precious metals complex is now underway.
Characteristic of the precious metals sector, we now have a 'manic move' underway back up based on the belief this time 'we're really going to the moon', and the sector is now infested with bears that can be used as contrary indicators. Therein, bullish speculators are back in control of the market once again for a brief period likely to extend until we move through a bout of seasonally based US Dollar (USD) weakness, which as pointed out in our last meeting, the timing of which coincides with options expiry on May 21st.
Looking for clues as to what we can expect in terms of pricing, Newmont (NEM: NYSE) is, as you know, an excellent barometer for the sector at large, so lets take a look at what can expect to see at expiry. Based on the current distribution in open interest (OI), where we have approximately 1400 more calls puts than calls in the May series at $40 against 2500 more calls than puts at $42.50, it appears a rally to somewhere around $41 fits the bill. (Note this perspective has changed with speculators taking put / call ratios below one in just a few days since this publication.) If speculators continue to buy calls at $40 between now and the 21st however, we will likely not end up there at expiry, as a ratio below one would infer a close below the measure at the mark probable.
Once the May series is expired, and evidenced by the price action over the past two weeks post the April expiry, prices can be expected to weaken once again, where if speculators buy enough calls at $40 for the June series, significant resistance will be established. Looking at the chart for NEM now, and with the gap up at the 200 DMA screaming 'fill me', one would expect to see this feat attempted at a minimum, which would also fulfill the test requirement as well. (See Figure 1)
Using NEM as our guide for the sector then, where it is considered the leader within the un-hedged community simply be virtue of it's size, this should engender a rise in the Amex Gold Bugs Index (HUI) to somewhere between 210 to 215 allowing for a sloppy right shoulder on the black colored structure denoted below. One should notice this would also allow for a test of the trend-line break as well, where I would not be surprised to see it violated briefly, adding to the confusion. (See Figure 2)
Thus far the rally has been on increasing volume, but not convincingly so, where the bulls are shooting first and asking questions later based on the large number of 'island bottoms' present in the complex. Unless we see a change in this regard, one is compelled to assume this is nothing more than a reaction bounce, and failure to make it up to the 200 area would add a new twist to the bearish case, a denoted in blue above. (See Figure 3)
The bulls are pinning their hopes on the fact the 'slanted inverse head and shoulders pattern' I first put forth as possibility on the Internet about this time last year has held on right shoulder support, but again, we cannot subscribe to this view in the presence of deteriorating internals. Much damage has transpired in the charts above and beyond what we would have expected to see at this point in the move down because of excessive bullishness being displayed by a falling number of participants in the sector, which is a recipe for disaster until this condition turns. (See Figure 4)
In this regard, and if I may digress from our review of the technicals in the precious metals complex for just a moment, where I would like to make a point I've been meaning to comment on for quite some time, and what I consider to be a 'key flaw' in the bullish rationale at this juncture, rising oil / commodities prices are not creating the same inflationary conditions today when compared to the 1970's episode, which in my opinion is large part of the reason gold has acted so poorly. Therein, and comparing what is ultimately going to matter, which is 'purchasing power', not only on the part of consumers in the economy, but investors in the markets, the situation today when compared to the 70's is quite different indeed.
In the 70's, we had a period of rapid wage inflation directly ahead at a comparable juncture to our current position in the gold cycle, where today at best, we can only hope for slow decay in real terms as a result of the pressures globalization has brought into the picture. For this reason, and remaining fully aware supply side constraints are likely to keep commodities prices relatively buoyant despite the aforementioned condition directly above, increasing costs (i.e. start thinking beyond just commodities to the finished product, interest rates, and any other rising costs that will squeeze disposable incomes) are acting as a tax on disposable incomes at this point. In fact, and at best, which does leave the door open to a more robust precious metals market at some point down the road once again, we are in a period of 'stagflation', where a sufficiently rising money supply is just enough to offset deflation because there is little regenerative (organic) growth within our mature economies, and where debt levels continue to rise requiring more and more new money to feed the machine all the time, leaving little else for other considerations outside of essentials for a growing number.
This condition is evident in recently released official statistics showing incomes are increasing at exactly the same rate as spending, and is the single biggest reason gold continues to lag the commodity complex in my opinion, given of course, and as mentioned previously, there has been insufficient interest in the commodity itself because of the greater profit allure in the stocks, as speculators endeavor to become millionaires overnight. (i.e. a destructive self-fulfilling prophecy.) This is why gold remains relatively weak on the bid side, as even soybeans, and certainly silver until more recently, seem more apt to get the job done compared to the metal of kings. (See Figure 5)
The Jeanie is out of the bottle on oil now with the triple top breakout recently, so we will know very soon exactly how much extra cash people have out there, as the matrix will either take it stride, or stocks, the other primary liquidity variable in the mix, will cave in, taking all things equity down the tubes. (See Figure 6)
Back on the ranch, and before we move onto a look at our indicators, I would like to remind you of the distinction between physical gold and paper precious metals stocks made some time ago. When one extends the understanding above into the higher operating costs we are now seeing reflected in the earnings of mining companies, and while the metal itself remains subdued, the advantage of owning physical over paper should become very apparent. Taking a peek at Cumberland Resources (CLG: AMEX & TSE), as it has become an obvious casualty of this situation, we can see that the performance of precious metals stocks may be vastly different than that of the metal itself, especially as we progress down the food chain, a strong argument to stick with quality across the board at this time. (See Figure 7)
The other reason I wanted to focus on CLG for just a moment is there's not another chart in the complex with a clearer wave structure, giving us important clues as to where we are in the corrective process, and the depths to be expected. Notice it tends to lead by as much as two weeks, and has at least one more good sized down leg yet to be completed. Therein, thus far CLG has crashed approximately 67 percent, where as the HUI bottomed 32% off its highs. If CLG holds at the measured move (MM) denoted on the chart above, this would suggest a total decline for the HUI of approximately 40 percent off high values, which just so happens to coincide with the 150 mark. (i.e. ~ 147 = 50 % Retrace)
Needless to say one should keep an eye on CLG at a buck (Cdn.), as if it can hold this value throughout the summer, along with the HUI holding a 50 percent retrace obviously, we may have a more interesting fall season than appeared to be in the cards just a few days ago. Speaking of the buck, and based on technical conditions in its chart, the next few days will be extremely informative as to the ultimate outcome in the larger degree move ahead of us. (See Figure 8)
I do not necessary subscribe to either scenario denoted above; as it could move sideways just as easily fall to the measured move (MM) target. Therein, give me a good reason to buy the Euro presently with the measured move (MM) denoted below a good possibility. (See Figure 9)
Certainly the indicators are suggesting this recent up-tick is just a hiccup in the corrective process currently characterizing the posture in precious metals. The NEM / HUI Ratio appears to be tracing out an 'inverse head and shoulders pattern' presently, where its ascent stopped just short of the 23.6 percent retracement, which is why we did not see the HUI complete an extended move down to 165 to end the prior wave. (Note this occurred just a few days afterward and that our subscribers were made aware of this likelihood ahead of time.) This may be a positive development for the bullish case ultimately, but we are not out of the soup yet, because many of the measures that monitor sentiment are still light-years away from even minimal retracement targets. (See Figure 10)
Unlike the above, some measures are much further along in the process, like the relationship between the HUI and the Nasdaq Tracking Stock (QQQ), where we hit the measure move (MM) target presented here some time ago to the decimal on the lows the other day. This is not necessarily a bullish development; so do not get confused, as not only are we likely just tracing out a fourth wave correction higher, accounting for the out-performance in precious metals shares over the past couple of days (i.e. not yesterday however), but there is of course the understanding if the QQQ were to start falling as well, gold stocks just won't fall as fast while this ratio remains buoyant. (See Figure 11)
As well, one should not forget about the fact precious metals stocks still have a long way to go in terms of under-performance when compared to the S&P 500 (SPX), where annotations in blue below should define the bottom of the first higher degree corrective sequence in the sector, along with the measured move (MM) in black hopefully defining the climax. As you know, identifying a bottom in the will require close monitoring, an endeavor we remain fully committed to as can see. (See Figure 12)
The Philadelphia Gold and Silver Index (XAU) continues to out-perform, along with the fact it is now building a right shoulder in the 'head and shoulders pattern' denoted in the chart below. (See Figure 13)
Based on the time it may require to trace out a neckline, it appears only the brave and foolish will be involved in precious metals stocks meaningfully after options expiry a few weeks off, so it will be interesting to see if the HUI / Gold Ratio will be able to get all the way back up to .50 for a test of the break in the meantime. (See Figure 14)
The same rationale applies to gold at $400, where a break above the mark will temporarily bring some life back into the sector, and provide those with unwanted and / or trading positions an opportunity to unload at good prices. (Note gold did not make it back to $400, and may remain under the large round number for quite some time.) (See Figure 15)
Well, there are but a few of the 'measured moves' precious metals investors should be concerned with at present, which will end our indictor review for today. Maintaining a close watch on those indicators that have proven to possess reliable predictive capabilities in forecasting price movements in the precious metals complex is undoubtedly a very good idea regarding preserving one's wealth. There are numerous good reasons to be bullish on the precious metals sector as we progress into the summer, not the least of which is their oversold condition. But at the same time, from what levels will renewed up-cycles commence, and will the moves be sustainable?
Above is just a small sample of the analysis provided for Treasure Chests subscribers every week. Fundamental beliefs are key to a success investment strategy, but they must be accompanied by a stringent monitoring of integrated technical analysis that measures key relationships regularly in order to ensure one is one the correct side of the trade when significant adjustments interrupt secular bull markets. I believe we are in such a situation in precious metals presently, and that as we work through the rest of the year, some significant and identifiable buying / trading opportunities will present themselves to informed investors. If you are interested in becoming one of the informed, please visit our site attached below.
Good investing all.