Gold-Oil Ratio... Weekly

People may think those of us bullish on gold get overly frothy and excited, but if you knew me you would know that is not the case. In fact, I would rather we lived in a world where we didn't even have to talk about the value of 'munny' and the value of some heavy and pretty stuff yanked out of the bowels of the earth. I run a business that depends on all remaining well with the economy and to tell you the truth, with a backbone-free Fed on the case I am not overly concerned. In fact, I am quite optimistic about 2008, at least in our medical equipment manufacturing niche. So, nor can I expect oil to have some cataclysmic decline. But relative to THE monetary asset, it looks toppy, and that is the final ingredient needed for the gold miners to establish some leverage to the price of gold.

Happy new year.

(Edit 11:39) I have an ongoing email correspondence with a couple pals, whose work you may have read at Biiwii.com/analysis or other commentary sites. The subject of contrary indications in the gold bug community has come up with a friend noting that [They'll] be disappointed with your measley 920 call...most say 1200 by Thursday lunchtime and will blame Cheney, Bennyboy and Paulson if it doesn't get there. In this regard, I am not sure if I have explained that the target of 920-940 is just that, a short to intermediate term target. Beyond that I have no opinion, bullish or bearish because the data is not yet in. In the biggest of pictures - which I'll define as several years out in a secular run - I think gold is going into 4 digits with a 2 as the first digit. But immediately beyond this triangle breakout, I have no opinion.

(Edit 11:59) And a concurrent correspondence...

Claude:

Gary,

That's exactly what I suspected, that you may have in mind a "relative" decoupling" [rather] an "absolute" one. But this is certainly already occurring. When Gold goes up or down by a percentage the other linked assets ( i.e oil, euro) don't move equally in percentage terms.

Similarly in the case of other financial assets, i.e the DOW/Gold ratio has been falling for years meaning Gold has outperformed the Dow.

In terms of "relative" decoupling" I'm with you. But how the hell are you going to make money from Gold falling less rapidly than Oil?.

Claude

Gary:

Here is the how Claude; the gold miners' cost inputs include oil & industrial metals, along w/ human resources. All those inputs have risen in cost during the economic expansion phase and gold did well but underperformed, which negatively impacted its miners' bottom lines. In a contraction or contractionary impulse phase, gold falling LESS than oil, GYX & employment would create margin for the miners. So I would see the metal as a long term 'value' proposition and the miners as a leveraged 'play' on the metal. The miners are where the real action would be if we get the right mix of intermarket fundamentals.

XOI Oil Index - Symmetrical Triangle Break Out

A while back we showed the XOI in an ascending triangle stance. Well, it has broken out and the target off of this triangle is... gulp, the 1770's. Hard as it is to believe. There is something in my DNA that does not allow me to momo a market like this, hence I bought some top uranium names that had suffered humiliating declines and a CanRoy that had suffered a similar decline. But I expect a lot of breakout traders have seen this chart and taken note. Edit (12/29 @ 8:10 am) To answer Claude's comment on Uranium, the stocks I have bought were taken near the recent bottom. This could indeed be an a-b-c in the spot price on the way to lower levels, but the stocks have double bottomed and this may be only a trade. I do not have enough of a feel for the dynamics in the energy and industrial metals patches to call the U's an investment quite yet.

Gold vs. other markets

As you know, the fate of the gold miners will depend on how their shiny yellow product does against their cost inputs, like oil and industrial metals. In other words, the real price of gold as measured against the commodity complex. Gold stocks are supposed to be counter-cyclical and that is why I am uneasy seeing the gold stocks rise and fall with all the 'inflatables' and the general stock market. Gold-Oil ratio has not done anything notable yet and Gold-GYX is turning down from over bought. Yet Gold-Silver is intact and Gold-Stock Market actually looks decent. So it's a mixed bag and it is why I refuse to add miners on up days and reserve cash. If gold breaks out vs. all this stuff, gold miners can be added higher with the confidence that we have a full economic contraction on our hands and these stocks will receive a bottom line jolt as most companies are getting the opposite. But for now, the inflationary growth story is hanging on by the skin of its teeth. Edit (8:24) Oops, I forgot to mention the reason I even worked up this post; gold has broken out of the daily symmetrical triangle which, if the breakout is not quickly reversed, theoretically targets our '900+' (920-940) range. We now need to watch and see how it does relative to other assets and markets.

Gold looking good, but no breakout... yet

Yesterday was 'wicked pissah!" as we say in Boston. The day before, a colleague sent an email talking about a gold breakout. Where he got that from I don't know, but it is indicative of how quickly sentiment can change in this sector. Everything is 'steady as she goes' in my book and buying the deeply over sold HUI-Gold ratio appears to have been a good strategy. In fact, if the HGR does what it did during the August bottoming process we may get another chance to add positions as it retraces maybe 50% of yesterday's hysterical gain.

There are US Dollar bulls coming out of the wood work now and our dear old uncle with the major debt load in his shorts may indeed rise more in the short term, but here are some factors that could fuel gold's rise to 900+ in the near (next 2 months) term: 1) The USD is even more over bought than it was on the chart that was shown a few days ago, 2) Gold's RSI shows significant room to rise, 3) Weekly & daily symmetrical triangles project gold to 900+, 4) Sentiment appears to be panicking back into the inflation trade and the 'January effect' story in the broad markets, 5) We got what we needed; an utter wash out of momo's who had no idea why they were doing what they were doing and 6) In a world where utterly debased funny munny propels paper assets ever higher in a macro Ponzi scheme of epic proportions, well, you just never know when the gold market is going to say "enough of this #@%!, I am outta here!" and propel higher, not to return until societies change the root mechanics of how they create, deploy and bastardize what we call 'money'.

Nothing is fool proof, but at least a set up appears to be in place for the next several weeks to months. Good luck, enjoy your holidays and keep your head screwed on straight - HUI has not yet negated the 'potential' head and shoulders top although the XAU appears to have done just that as of this writing.

Edit (12:30) Sandro, thank you again for your generous donation and for those you've made in the past. To the others as well who have thrown a coin in the cup in the past... thank you! I thought long and hard about commercializing a newsletter service, but I just cannot justify it because on top of running a business, website, 2 blogs and trying to be a good dad I now have got to learn some fairly confusingly arranged original songs on guitar lest I be excused from my duties as 2nd guitar player in what seems to be becoming a band.

Huey, etc.

We are back to the lonely theme here and this is comforting. In fact, the worse things have gotten in precious metals equities, the better I have felt and the more nibbling I am doing. The chart is of the HUI, and it of course sports some pretty nasty 'potential', but charts are just charts and by now every geek out there sees the H&S on the index (along w/ the likes of GG) and fear is once again riding shotgun. The red headed step children of the PM sector, the juniors and explorers - where most of my positions are - have been absolutely humiliated and sold out. The nasty 'potential' has been realized to a large degree. But I am a TA guy who is cursed with fundamental beliefs, which is of course not really a curse but a source of comfort and strength. I look forward to continued buying opportunities in the juniors and some select larger producers.

This support area could well hold as the HUI is a 'buy' relative to gold (check the HUI-Gold ratio). One caveat to this scenario however is that I am seeing our symmetrical triangle in gold being broadcast all over the place (including by me). EVERYBODY knows now that gold is in a 'bullish' sym-tri and the Dollar is getting over bought. Everybody knows. And in this crazy sector, dat ain't usually bullish. So I remain open to lower stuff to come in both the metal & the miners. But doods and doodettes, the big picture - especially if oil breaks down - is hyper bullish. IMO.

US Dollar & unchanged gold stance

Again, it is lonely being a puny little market participant. You are you, I am me. We all have our decisions to make. My decision is to take a couple more [modest] profits on tech stocks (and a loss on TEO), cash up and take advantage of the gold stock pukage to targets. The USD looks to be approaching a nice, juicy target and Q1 could be very exciting to the upside for the right assets.

Gold-Silver Ratio

Is anyone paying attention to this? Silver outperforms gold in an expansion as the inflation had already happened. But in a contraction, which the GSR is clearly forecasting, gold will outperform as policy makers come under the gun to inflate. Gold is the early warning mechanism before easy money finds its way into all the 'inflatables'. This cannot be disputed at least in so far as the last contraction was concerned. It spawned this major bull market in gold.

Santa... you on schedule?

Of the original Santa stocks, TXN, QLGC, CCMP and MSFT only Mr. Softie was retained in the face of the profit taking urge. Yesterday I bought back QLGC (must hold noted support) however, added TEO above a cluster of support (which again must hold or I say goodbye) and PVX because how much worse can NatGas & the CanRoys get? Collecting the dividend will help as we wait to find out. Maybe it'll get a lot worse, but I am not buying the deflationary spiral into Armageddon economic crash scenario in case you have not already guessed. I do buy the 'we're locked in to inflation, inflation and more inflation as far as the eye can see' scenario however. Hence, core gold miners are retained and held tight. As always, cash is well on hand as well. Edit (12/17 @ 11:24) Ref: comments to Doug, here is the SeekingAlpha article that cast some considerable negatives on FTEK. Insiders are buying and this could be an amped up short attack, but the author calls FTEK "massively overvalued" and as I have written several times, the valuation certainly is the kind Cramer seems to like to recommend but Fuel Tech is now far from the undiscovered gem I used to know and love.

Run Away!

If pre-market is any indication (and very often it isn't), we could have another one of those moments; you know, the ones where gold bugs' resolve is tested and the ones who don't know why they do what they do (momo's and various other inflation-traders) are broken and take their losses yet again. Tax loss season only adds to their incentive.

Santa is in full swing and remains on schedule as the nation that knows denial is not just a river in Egypt tells itself a happy story (the abbreviated version of Goldilocks) for the holidays. The US Dollar is finally getting its counter-trend rally with resistance noted over head. The broad stock market is temporarily in a USD positive correlation stance, Bank of America and Morgan Stanley raised their estimates for economic growth in the wake of the "consume at ALL costs" American consumer's irrepressible (one might say chronic) penchant for doing what he does best; use unproductive means to get to seemingly satisfying ends. So, happily, consumer nation prepares for the holidays in good cheer. Wall Street, in the heart of bonus season, cheers right along.

Back to gold, the counter-cyclical asset. While we suspend disbelief for a while and the USD catches a bid, gold bugs get clobbered. This is not a conspiracy. This was an over-bought market that was plunged into head first by legions of people who do not understand anything about the big picture but rather are routinely subject to the emotions and knee jerks of the short term. They are being bled out and this is healthy. Goldman projects 600 gold next year and previously OVER bullish sentiment is getting unwound. Astute gold market watchers are feeling more bullish (they were uneasy with the frothy momo to the 840's, I will guarantee you) with these developments. The big picture is bullish for gold and the short term noise is counter trend stuff. I am still leaving open the daily symmetrical triangle and its near term target of 920 (in conjunction with the weekly symmetrical triangle projecting to the same area) but if you have eyes, you see gold is under siege at the hands of the Santa-Goldilocks partnership.

If you are emotion driven, you see the bunny ripping off men's heads. If you are using logic... well, you know.

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HUI - worst case may be coming up

Or is it best case - if you are a buyer? Sadly, the potential H&S top first identified here has a much better chance of becoming reality today as the neck line is in danger of giving way. Basically, a reversal is needed and it is needed soon - as in today or tomorrow the latest or this thing may well capitulate and drive toward the H&S target area. Sucks, but it is what it is. I will withhold any buying until this thing either proves a head fake or until we arrive near the H&S projected target. Edit (2:32) The more I look at and think about this nasty looking chart, the more I think that lower target is a low probability risk. It is tax loss selling season and I would think we are in full swing right now, especially with the small miners and exploration stocks. Also, I look at the weekly chart and see solid support in the mid to high 360 to 370 range. Finally, there is the still bullish though much less frothy monthly chart. Call me a cockeyed optimist ;-) but I am not going to let a chart pattern concern me too much, and if by some chance it does express itself to target, I will be ready.

Issue w/ Blogger and SiteAdvisor

This morning I have come to my own blogs to find McAfee's SiteAdvisor warning of phishing scams at both blogs. Lovely I thought. I checked all the content over on the side panels and it is all on the up and up. In a case of misery loving company, I checked other 'blogspot.com' sites, including Mish's blog, and found the same issue. Relieved, I will just be patient and secure in the notion that you dear reader, know better. Edit (2:13) When you click "view site details" in the SiteAdvisor menu, it states that blogspot.com is fine and dandy.

Oil Index

It remains to be seen what this means for crude, but the XOI is in a bullish ascending triangle stance. I have been looking for oil to top out forever and a day, but if the XOI is any indication, it is not happening. Normal cycles appear to be getting disrupted by a market that seems to have Bernanke's (and Trichet's and all the rest) number. Global markets know these guys are in a box and competitive inflation is the only way out. The Fed is seen as weak here and no match for the global market casino. If this ascending triangle breaks out, the NatGas sector does likewise and heaven forbid the major indexes make new highs... I will prepare to abandon the gold above all else stance and add energies (beaten up Canroys are an option) and base metals to the mix liberally along with some LatAm and tech. We are institutionalizing an impotent and compliant Fed. Yes that is healthy. For now however, it remains gold above all else as financial hazards remain amplified.

Email from reader Claude

Hello Gary, I just updated my Gold Barometer for the next six months. The projections during this year have been surprisingly accurate and did not have to fine tune them as data became available.

You may recall that I tried very hard to console last June as your mood was "gray" but the Barometer promised an imminent sharp move up for Gold. And so it happened.

Now, however, the Barometer is losing altitude and is signaling a decline/sideway action for Gold at variance with the bullishness I just found expressed in your latest editorial. I think $775 is more likely than $900 in the intermediate term,

Hope you will post the Barometer on your blog for the possible benefit of others.

Best regards, Claude

My reply:

Hi Claude,

My pullback levels have not all been met yet. 773 was my MINIMUM decline but I still have open all the way down to 720 or so. I think that unlikely, but it is open. My 900 projection is based on a large sym triangle ongoing for months now, but I found it interesting that the small sym tri was projecting the same level. Again, I am not not frothy by any means. But nor am I bearish. Just being patient.

Regards,

Gary

PS Claude: I never get "gray" or in any other mood. At least not so my trading decisions can be affected by it. Any market is either going up or it is going down. Our job is to get on the right side of that. Some of what I write on the blog has fun in it or sometimes I'll let some cartoon like irony out, but the day this becomes 'not fun' is the day I quit it; blog, website, stock markets, the whole enchilada.

Bearishness to return soon?

I am leaning that way now that Santa is in full flight. A chart has been added to the front page of the website that should about sum up the situation. In parting with QLGC & CCMP, I sold what I consider to be two good companies below where I think they are going in the near term. But how many times have you seen me sell too soon, eh? I tend to buy early as well because I buy when downside risk is minimal and sell when risk increases to levels I find unacceptable. The volume on the major indexes looks pathetic and Jim Kunstler makes a good point thusly:

Anyway, this argument is academic because the Hope Now Alliance is just a political sham. The purpose of it is not to save the hapless occupants of over-leveraged houses, but first to buy a little more time so that the worker bees in the financial industry can justify awarding each other multi-million-dollar Christmas bonus packages, and second, to postpone the "workout" of all this bad investment as far into the future as possible.

Edit (12:36) I would like to thank Texas Instruments for a nice little 10% trade in the semi sector. Only Mr. Softie left under the tree.

SOX approaching retrace levels

Checking up on Bully

I do not own any stocks that are 'typical' of the average S&P 500 company. But I thought I would throw up the SPX as a picture of the broad market. Santa is well on his way to target but I am evaluating whether or not to do some selling into the Fed. Buying the angst-o-rama bottom makes it easier to consider parting with some things now that the rally is about 75% to target. I want to raise cash as this rally expresses itself. As usual, we'll let the come lately momo's take her wherever she's going after that. Edit (2:00) Took profits on CCMP & QLGC. Holding TXN & Mr. Softie for now.

Santa Arrives on Time... Precious Metals Bide Time

As blog readers know, the bottom in the Semiconductors, tech stocks and broad market was nailed in this space and taken advantage of in anticipation of Santa. This occurred even as some respected and highly visible analysts began calling "bear". And I respect their call, because at this point there is no evidence that what we have here is anything other than a fine, plump Santa come a callin'. A couple notes are due here; I told the blog I would not tout the Santa bottom feeding call in any public articles because I am a guy who has been calling for an airline rally for the last 20% decline. There are no geniuses in this business. Just hard working people who try to get it right and when they don't, adjust and evaluate why they were wrong. We are all wrong at times. So there is my disclaimer.

I do have a soft spot for technology companies with little or no debt that do not depend on fossil fuels and help enable an increasingly information-connected global economy. So I do not necessarily see an across the board bear market as a given at this time. Macro fundamentals, sentiment and of course the charts will tell us all we need to know going forward.

Here are charts of the Dow and SOX, showing room to run for Santa.

Click charts to enlarge


Another theme we have been carrying forward on the blog is the bullish status of gold in all time frames - Goldman's wacky TA call on gold's downward turning long term momentum indicators aside. The short term (daily) froth has been all but wrung out of the precious metals and the weekly charts are now much less frothy. Monthly charts are very bullish in mockery of Goldman Sachs' TA analysts.



Both gold and silver look very healthy and on daily charts appear to be simply biding time and bleeding off the excess. I love confluence and with gold we have a daily target of 920 or so off of the forming symmetrical triangle in concert with the same target off of the weekly triangle we have been following. Sentiment has gone from euphoric (bearish) to angst ridden (bullish). We should not ask why more people do not get this dynamic because if they did, we would not be able to take advantage. Greed-Fear, Greed-Fear... wash, rinse, repeat.

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Ready?

Because by the looks of the pre-market, here it comes. Down the page you will find the chart of gold (weekly) showing some reaction targets. In fact, this was seen as possible (daily) nearly a month ago. I, like many of you was 'hopeful' the reaction had been satisfied at the higher levels, but it appears this is not to be (although I have seen some pretty wild pre-market head fakes in the past. This reaction conveniently comes just before the meeting of some powerful people who have routinely conferred / conspired with other powerful people (like Paulson). These people will set 'easier' monetary policy next week. It also comes as their European counterparts are coming under pressure to do the same.

We in the PM sector rode an overbought status to a frothy top and it is important to remember that this is how the sector reacts. It is a small market and the swings - both up and down - are exhilarating and violent. At times like this I think "Gary, you effun' knew this downside was coming and yet here you sit with too many gold miners on your books". But this is all psychology that must be managed as nobody has a crystal ball. As one of the people who (thinks he) 'gets it' regarding the gold play on current macro events, I simply must always have a core of miners at all times as long as the fundamentals remain positive. I have been less of a trader since mid-summer because when the funda's changed, so did my stance. I am a card carrying bag holder who will continue to add to his bag as this reaction climaxes. Meanwhile, a Fed that has been handed lower oil and lower gold is a Fed that can pretend to be in control. It's all a game of cat and mouse.

The US Dollar is getting its moment. This was also needed. What we have going on here is bullish for the gold sector beyond the bi-polar psych of the immediate term (euphoria quickly turning to fear and angst). Let the Fed look strong. Let the Dollar look viable. Wash out the significant weak hands in the precious metals trade... and move on. Wash rinse and #@!%'n repeat. Edit (9:59) There, now that was easy ;-)

Chart quickies

One of our Santa Rally vehicles... QLGC

Here is a chart of Qlogic looking pretty good. I own this guy along w/ TXN, CCMP & Mr. Softie as my semi/tech stocks per the articles below identifying the potential bottom in semi's and techs while the bull horns - or should I say bear horns - were blaring. I have not yet decided whether this represents a longer term opportunity or just some Santa relief. One writer (can't remember who but he is bearish) mentioned that a lot of writers will likely come out touting that they called the bottom. Here on this blog, we did. But I will not make a big deal out of it or go writing an article touting the call because I am the guy that was looking for an airline rally a while back, about 20% north of here (I still am btw ;-). Also, Santa's sleigh could hit a nasty ice patch at any moment given the very real problems out there in the financial sphere.

Ladies & Gentlemen... Presenting our old favorite

The Yield curve! Complete with marked up mess attempting to put a whole macroeconomic thesis in one busy little picture. Regarding the precious metals stocks, I feel like I have been corrected but good which I suppose is the whole idea of a correction. In the midst of these boring, dull and often painful periods I often go back to a variety of macro oriented indicators just to be sure the backdrop looks good. Oil is/was a biggie as had been the yield curve and oncoming damage in the credit markets. But bearing in mind the 'potential' H&S in the HUI (shown down the list a ways), tax loss selling season (this is relevant for junior gold holders such as yours truly) and bipolar nature of this sectors' investor base and finally an over sold Dollar, we cannot rule out some additional nastiness on the downside. But I am big picture bullish, bottom fisher that I am. Especially on the lil' fellers that are just being given away out there for ridiculous gold in the ground prices.

What is the nature of this oil top?

I see a downside to the high 70's to 80 as very likely. But then again, I have made an illustrious career out of top calling oil. The question is whether this is a major top or a hard correction in process. 80 may only be a stopping area before lower prices but that's err, getting ahead of ourselves. Blogger informs that the image upload glitch is fixed. Yay.

Airlines

What is my fascination with this sector? Oil, plain and simple. My fascination w/ Airlines is a direct result of my fascination with oil. And I am hopeful that we are finally making some kind of a decent top in oil which will likely do two things; strengthen the airlines and provide buying op's in gold stocks (in progress) which are being sold off along with oil even though high oil represents a fundamental negative to these companies. It should shape up to be an opportunity born of ignorance. I am uploading an XAL chart and I hope the blogger issue is remedied. #%!@ it's not. Edit (12/5 @ 11:50) Chart re-uploaded. Should work now.

Post on Commentary blog on Gold

In light of Goldman apparently scaring the crap out of the 'gold community' (SHORT GOLD in '08!, LOL) I made a post over here. Jim Sinclair could be wrong. I could be wrong. You could be wrong. But tell me, since when did this market ever make you feel like you were right indefinitely? All the way from 300 (when I first came aboard) there have been giant walls of worry constructed.