Gold Sector – An Obscure Indicator Provides A Signal

The Goldminbi

In recent weeks gold apparently decided it would be a good time to masquerade as an emerging market currency and it started mirroring the Chinese yuan of all things. Since the latter is non-convertible this almost feels like an insult of sorts. As an aside to this, bitcoin seems to be frantically searching for a new position somewhere between the South African and the Turkish lira. The bears are busy dancing on their graves.

Generally speaking, bears have little to celebrate these days, but in some sectors they still do. If you want dancing bears with music, they have those on Youtube.

The technical divergences we previously spotted have for the most part given up the ghost rather unceremoniously and quickly, although there are some remnants of technical hope in the form of diminishing momentum of the downtrend in gold and the lack of a new low in the HUI-gold ratio.

We don’t want to make too much of the latter since it wouldn’t take much to erase this divergence as well, and obviously, the previous “breakout” in the ratio turned out to be misleading. A few other interesting developments have occurred though, which we discuss further below.

There have been no further improvements in the fundamental backdrop for gold, although it seemed for a while as though things were beginning to shift in favor of the metal, at least in terms of some of the relevant indicators. Rising real interest rates in the form of TIPS yields, in particular, continue to be a big negative though.

The biggest positive factor is undoubtedly the growing US federal deficit, but the market is unlikely to become concerned about it as long as GDP growth remains strong. Other than that, the main potentially positive development consists of the fact that the trends in many macroeconomic drivers are so stretched that they are probably quite close to a reversal. Here is the current situation in gold:

Gold – letting its inner Mao hang out (see insert of USD-CNY: recently the correlation between the yuan and gold has become extremely strong). The momentum of the downtrend in gold has slowed a bit, as reflected by the divergence between price and RSI and the HUI-gold ratio has not made a new low (yet) – not for lack of trying we might add.  

Bears Galore

We previously thought market participants were looking beyond the gold-bearish macroeconomic backdrop to the inevitable eventual denouement of same, but it seems they were merely slow on the uptake. Now that they have noticed, they are expressing their new-found conviction with such gusto that one has to wonder if they are not way too late. Here is the positioning history of the “managed money” category as of last week’s commitments of traders report: