Thursday, 29 May 2014

Screws tighten as gold makes its death cross

 "If you can dream it, you can do it." -- Walt Disney

Lately, I feel like the village witch doctor as I shake my rattle and note the signs of impending doom in the patients I am monitoring.

In this case, the signs of doom are the "death crosses" that keep forming in the charts of key items in the precious metals complex.

Gold's death cross is not a promising omen...
cemetery stock photo by

Today it was gold's turn, as a death cross finally formed in its daily chart:

The death cross in gold was foreshadowed by death crosses forming in the charts of the key gold and silver mining indexes and ETFs (see previous posts).

Despite the death cross forming, gold held its ground on Thursday, and the mining shares popped some. This is not surprising. I have found that near or at the moment of the forming of a death cross, the item in question often temporarily strengthens. It seems to be the market's way of throwing investors off the scent.

A death cross by itself is not a sure sign of doom. Sometimes a death cross doesn't amount to much. In this case, I think it is a highly meaningful negative omen. That's because it is forming off of what many believe is a bear market bottom carved out in late December. My studies show gold and the mining indexes don't all make death crosses together shortly after a bear market bottom is in place.

To put it another way: something appears to be very wrong with the picture that the precious metals sector has put in its bear market bottom.

As readers know, my models are warning that the current action in the precious metals sector is likely warning that the third and likely finally leg of the bear market has re-activated. The last leg of any bear market is often the roughest section.  My models suggest that a 50% decline from gold's all-time high in 2011 may be coming into play.  That would suggest a target of around $957 give or take. Time will tell.

I was reading an article today where the author noted that the mining shares as a group were at their cheapest level historically in relation to the gold price. The suggestion is that they must be a bargain.

The problem with this kind of analysis is that it is so simplistic. What has actually happened in this gold bear market is a number of long-standing relationships gold has had to a number of items, including the mining indexes, have completely broken. As such, that the miners are cheap historically in relation to gold is an almost meaningless observation.

The better way to approach this issue is to ask: HOW is the value relationship between gold and the miners likely to be reset in the course of this bear market? Or from another perspective: Where is the new floor in value between gold and the miners likely to be found? If one can answer these questions, then one can better determine if the miners are cheap in relation to the gold price or not.

I've been asking these questions.

My market models have answered: the miners don't appear to look that cheap.

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