Inconclusive Technical Situation

In a recent missive, Fred Hickey made an interesting remark regarding gold seasonality. He reckons that the seasonal trends in gold are mainly tied to  seasonal demand in India, which certainly makes sense when considering the timing of these trends. Given that, he concludes that this year, the seasonal behavior is less relevant for gold prices, since India has been subject to import restrictions for quite some time (as an aside to this, it is widely expected that the new government of India is going to repeal some of these restrictions).

Anyway, apart from noting that gold fundamentals are slowly improving – for instance, the recent rally in treasuries has resulted in a widening of credit spreads –  we are always keeping an eye on the technical and positioning situation.

Obviously, gold itself hasn't done much yet since its recent breakdown from the triangle, as the daily chart shows. Essentially there has been a single slight up day in the wake of the ECB rate decision. The daily chart of gold therefore gives no indication of a trend change yet:

Gold, daily: not doing much yet – click to enlarge.

Zooming in on the past few days, things look slightly more interesting. What is noteworthy is that gold managed to rebound from a bout of knee-jerk selling on Friday following the publication of the payrolls report, which was by and large in line with expectations and fairly strong by recent standards.

Gold, June contract, 20 minute chart – on Friday, knee-jerk selling after the publication of the payrolls data was reversed, with gold ending the day just a smidgen below Thursday's close - click to enlarge.

It seems likely that there was a bit of short covering in gold, as the most recent commitments of traders report once again saw an increase in speculative gross shorts. The disaggregated CoT report shows the gross short position held by “managed money” having reached a multi-year high (which compares to a gross short position that was about 1/20^th of today's in 2010 and 2011, so these traders tend to be wrong near extremes).

At the same time, there is a veritable crescendo of bearish commentary published  in the mainstream financial press, with targets being lowered by prominent bears, while even the few hardcore bulls that are left generally leave a discouraged impression.  To be fair, this state of affairs has pertained for some time. However, it needs to be remembered in this context that gold remains higher today than it was at the June and December 2013 lows, so after one year of being bombarded almost daily with bearish commentary in the press, we have yet to see gold actually break to lower lows. In other words, the situation still has all the typical hallmarks of a bottoming period.

Commitments of traders in gold futures, legacy report - click to enlarge.

Subtle Signs of Improvement in Gold Stocks

While the technical situation in gold itself is not yet signaling a trend change, there continue to be subtle signs of improvement in evidence in the action in gold stocks. Note that while we only look at indexes and ETFs below, they actually mask quite a bit of positive action in individual stocks, many of which have acted reasonably well, especially in the junior and mid tier sectors (obviously, there are exceptions, but it is still a noticeable development, and the opposite of what could be observed between the 2011 and 2012 peaks).

Gold stocks have continued to slightly increase in strength relative to gold in recent trading days, and the effect is especially strong in the junior sector.

The HUI and the HUI-gold ratio – the latter continues to drift higher from its recent multi-month low – click to enlarge.

Contrary to the HUI, GDXJ has already recouped the entire loss incurred in the course of gold's recent breakdown from the triangle:

GDXJ and the GDXJ-gold rati- click to enlarge.

Conclusion

Gold stocks continue to represent an interesting contrarian and value proposition.  The market has basically ignored the cost improvements reported by many producers in recent months, but it is not unusual to see positive news being given short shrift in a market that has just gone through a major decline. This is especially so in this case, due to the prevailing negative sentiment with respect to gold itself (which as noted above has not yet led to a break below last year's lows).  While there is certainly still a residual risk as gold may not be finished declining yet (we don't believe so, but we obviously can't be certain), this risk appears balanced by a potentially large reward. We have always stressed that patience will be required, and that may be the case for a while longer still – but it seems this is a good time to be paying close attention. 

Charts by stockcharts, sentimentrader, barcharts