There are good reasons for gold timers to be bearish. For one thing, gold has been mired in a descending triangle over the past year or so. From a technical perspective, such triangles are likely to be continuation patterns. Gold fundamentals have recently worsened a bit with the most obvious headwind being the continued strength in the U.S. dollar, but this isn’t the only indicator that has turned more bearish lately. This article is an update of the indicators we follow.
The above introductory comments are edited excerpts from an article* by Pater Tenebrarum (acting-man.com) entitled More On Gold Sentiment.
Tenebrarum goes on to say in further edited excerpts:
Stock & Sector Sentiment
…Sentimentrader’s industry group sentiment table, below, shows that gold and energy stocks are currently at the maximum bearish level they can reach by this measure:
Sentiment on stocks in various industry groups – gold and energy are currently stuck at “zero bullish sentiment” – click to enlarge.
Other Sentiment and Positioning Measures
The next chart shows an update of the discounts to net asset value of closed end bullion funds, as well as Rydex precious metals assets and cumulative cash flows compared to the gold price.
- The discounts to NAV of CEF and GTU (closed end bullion funds). It is worth noting that both CEF and GTU have recently reflected even greater bearish sentiment than at the 2013 lows.
- By contrast, Rydex precious metals assets and cumulative cash flows still rest at slightly higher lows, which is partly due to gold stocks still diverging somewhat from gold – click to enlarge.
Gold Hedgers Positions
The positions of commercial hedgers and small speculators in gold futures continue to reflect the effects of the ongoing downtrend, but with regard to these data it must be kept in mind that these positions could still worsen markedly in a long term bear market. These positions are only extreme compared to those of recent years.
Relative Prices and Ratios
Gold stocks have weakened significantly in recent weeks, not only on an absolute basis, but also relative to gold. However, they still diverge from gold relative to the situation at the May low. Moreover, after briefly correcting against commodities, gold has recently begun to rise again versus the CCI. This is usually a subtle sign of declining economic confidence, akin to credit spreads.
Below are charts showing gold and the HUI, a comparison of GDXJ, HUI and the HUI-gold ratio, as well as gold versus commodities (gold-CCI ratio). GDXJ is still slightly diverging from the HUI as well (its divergence with GDX, which is not shown, looks similar).
A rising gold-CCI ratio is usually positive for gold mining margins, even if the nominal gold price is weak. However, when bearish sentiment becomes very pronounced, the market tends not to care much about this. Readers can easily ascertain that on an anecdotal level, a lot of bearish sentiment is in evidence as well. On average, the major financial news services (Marketwatch, Bloomberg, Reuters, etc.) publish between one to two bearish articles on gold every day recently, which is quite a density even by the standards of the past two years.
It can probably be taken as a given that the vast majority of market observers and participants expects the descending triangle to result in a break of support. Note in this context that silver has clearly broken through its long term support shelf already, which has presumably cemented the negative views on gold.
a) Physical Gold
The descending triangle in gold and gold’s slight medium term divergence with the HUI index – click to enlarge.
b) GDXJ, the HUI and the HUI-gold ratio
GDXJ has been stronger than the HUI, which in turn has been stronger than gold (on a medium term basis, not in the short term) – hence they all continue to diverge from each other for now – click to enlarge.
c) The Gold-CCI Ratio
After a one month long correction, gold has resumed its uptrend relative to commodities (in this case it means it is falling more slowly). However, after diverging positively from the ratio in June, gold stocks are currently diverging negatively from it – click to enlarge.
d) The US Dollar Index and Its Ratio to Gold
After resisting the headwind from a rising U.S. dollar for quite some time, gold has finally succumbed, not least because the U.S. dollar’s uptrend has become quite relentless. The U.S. Dollar Index has in fact broken above a long term resistance level, so this is a serious problem for gold at the moment (gold continues to look a lot stronger denominated in foreign currencies). However, in spite of this, the dollar-gold ratio has not moved very far above its previous peak yet. In other words, gold has not been as weak as one would have expected based on U.S. dollar strength alone. This confirms that the U.S. dollar is far from the only factor influencing the gold price, even though it is obviously a pretty important one.
The U.S. dollar’s recent strength has been relentless. Bullish sentiment on the dollar is accordingly quite skewed as well. However, foreign exchange trends have a tendency to be relentless once they get underway, so one should probably not read too much into current high bullish sentiment and overbought conditions, even though they argue at least for a short term reaction…
Gold looks technically quite weak, and whether the slight divergences that are still in evidence at the moment are meaningful remains to be seen. However, since sentiment has reached extremes in both gold and the dollar, a short term trend change is likely quite close.
Note here that an average of the most important sentiment surveys shows the bullish consensus on the US dollar to be at 87% at present, which is in fact a record high. Investors are even more bullish on the dollar today than they were at its highs in 2000 and 2001.
The comparable statistic for gold is at 18% bulls, which is not a record low, but definitely among the lowest readings on record (most of the lowest bullish sentiment readings in gold were produced in 1998/99 and 2013).
Once a rebound gets underway, its technical quality and the evolution of the fundamental and sentiment backdrop will have to be assessed to see whether it is just another short term blip or something more….(but) it is certainly possible that gold violates the support levels of 2013 (given that it is only a little over 30 dollars above them), but such a break is not likely to be sustained in the short term in light of the current sentiment backdrop.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
**http://www.acting-man.com/?p=33152; Charts by: Sentimentrader & StockCharts (Copyright © 2008-2014 acting-man.com – All rights reserved)
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