Somebody Is Trying To Smash Gold Prices

It looks like somebody is trying to smash gold prices. Look at the chart below:

The chart shows daily gold flows reported by GLD. Generally, gold outflows from GLD vaults have a negative impact on the prices of gold. Notice that whenever there is a red bar (gold outflow) the prices of gold go down or, at least, do not go up. And vice-versa, green bars (gold inflows) have a positive impact on the prices of gold.

Therefore during corrections (the area marked in yellow) we see more red bars and during a move up the green bars  dominate.

However, most recently (this and last week) the red bars occur even during positive trading days (when gold prices go up). For example, yesterday as many as 457.7 thousand ounces of gold went out of GLD vaults.

It looks like somebody wants to bring gold prices lower. The similar situation took place in late March 2016. The increased outflows of gold from GLD extended the correction by a few weeks. But later on the prices of gold renewed their march up...

B2 Gold Reports Record Production

In September 2016 B2 Gold encountered a severe blow from the Philippines environmental authorities. The company was among 20 mining companies recommended for suspension. On that news B2 Gold shares tanked. Although later on the company announced that the problem had nothing to do with environmental issues B2 Gold shares were tanking again.

Today the company released its 3Q 2016 production report. The operating results are excellent. Although the Masbate mine (a Philippine operation) delivered substantially lower amount of gold, compared to the previous quarters, the other two mines, Otjikoto (a new operation located in Namibia) and Libertad, delivered much higher amount of gold then previously - look at the chart below:

source: Simple Digressions

What is more, the company increased its 2016 production guidance. The Masbate mine should deliver as many as 200 thousand - 210 thousand ounces of gold in 2016.

According to the new estimate, B2 Gold should produce 535 - 575 thousand ounces of gold in 2016, in total (in 2015 it produced 493 thousand ounces of gold).

Summarizing - B2 Gold goes in the right direction.

A Quick Look At The Current Correction In Precious Metals, Once Again

I guess many investors wonder where the current, deep correction in precious metals stock prices will end. Let me put an excerpt from the third issue of the Simple Digressions Newsletter (dispatched last Sunday):

"Chart 3

Source: Simple Digressions

The chart shows in / out flows of gold reported by GLD (the world biggest physically backed gold exchange-traded fund) on a weekly basis. Look carefully at the circle marked in brown. It shows that this week GLD prices (and gold itself) dropped 4.7%. However, and that is the main point, the fund reported an inflow of 352 thousand ounces of gold into its vaults.

Using other words – investors took advantage of lower prices of gold to load up fresh ounces into GLD vaults. In my opinion, it is a strong argument for gold bulls because, generally, when gold prices are falling GLD reports withdrawals of gold. This week’s inflows show that North American investors are doing things that prudent investors do (as, for example, the Chinese) – they are buying at lower prices.

Summarizing – I do not know how long the current correction in the precious metals market will last (my crystal ball lies in the cellar, covered in dust).  However, I know that this week Mr. Market offered many precious stocks at bargain prices, once again. I also know that prudent investors are still accumulating gold. It is by no means an indication of a bear market. Quite contrary"

 

Today I would like to add another point - a simple technique identifying the point / range where the precious metals market may have its strongest support. To do it, I will use the indicator offered by Stockcharts.com, called "Volume By Price" indicator.

 

According to the Stockcharts website, Volume By Price indicator is defined in the following way:

"Volume-by-Price is an indicator that shows the amount of volume for a particular price range, which is based on closing prices. The Volume-by-Price bars are horizontal and shown on the left side of the chart to correspond with these price ranges. Chartists can view these bars as a single color or with two colors to separate up volume and down volume. By combining volume and closing prices, this indicator can be used to identify high-volume price ranges to mark support or resistance."

Now, let me show the chart of GDX (which represents the broad precious metals stock market), applying the Volume By Price indicator: 

 

source: www.stockcharts.com

The chart shows that the highest volume, at which GDX share were trading between 2011 and today (during the last bear market in gold and at the beginning of the current bull stage), is attributable to the price range of $17.0 - $20.5. Using other words, it is the price range, which may be considered as a strong support or resistance level for GDX prices.

In the first quarter of 2016 GDX broke above this range. On that event a very strong support level for any correction in GDX prices was created.

According to the theory, now it should be very hard to bring GDX prices below this level. Putting it differently - the current correction should end slightly above or within the area marked in orange...

Looking For The End Of The Current, Deep Correction In Precious Metals

It is not easy to tell when the current correction is going to end. I do not have a crystal ball but let me make a guess.

As I wrote in my last post, deep corrections end when weak hands investors go away in despair.

Generally, the so-called weak hands enter any market on specific technical signals. Because weak hands are not smart investors they apply the most simple (or, better said, primitive) methods to find entry points. One of the most popular rules is this:

"Enter a market when the 50-day simple moving average crosses above the 200-day simple moving average "

If that pattern occurs, weak hands enter a market en masse. So it is quite easy to find at what price levels these investors entered any market.

Now, let me show at what price levels weak hands investors were probably entering the precious metals market, taking GDX as an example:

source: www.stockcharts.com

The chart shows that the 50-day simple moving average crossed above the 200-day moving average at around $19.0 (in early March).

Further, it takes time to load up a significant amount of shares so I guess weak hands were entering the market between $19.0 and $$21.2 (the area marked in yellow)

If I am right, these investors now hold a profit of around 10% - 23% (assuming the last closing price of GDX of $23.4 a share). It means that they are very close to the point where there is no profit at all. That is why they panicked yesterday, throwing lots of shares to lock in this small profit (look at the yesterday's huge volume of 232M shares).

And here is the positive thing - weak hands are close to go home empty-handed, which means the end of this deep correction.

What is more, once again many precious metals shares present buying opportunities (more on this in my incoming third issue of Simple Digressions Newsletter).

The Deepest Correction In This Bull Cycle

We have the deepest correction in the current gold bull market stage. It started in early July so we are in the third month of it. While the gold lost only 4.7% of its value (since the top made in early July) GDX lost much more (around 19%). Well, it is called leverage - when gold goes up gold stocks go up much higher...and vice versa.

Now we have the latter case and, in my opinion, it will end when, for example, investors renew the upward trend in gold flows into GLD:

source: Simple Digressions

On the chart above, black lines indicate the periods when gold is flowing out of GLD. Note that during these periods gold prices go down (in this particular case the gold is represented by GLD).

In the current gold cycle we had a similar situation in March and April. Now we have the second, bigger correction.

In my opinion, investors should be patient - the market, especially gold and silver related stocks, went too high and too quickly. As a result, too many weak hands own stocks. When they go away empty handed (as always) another leg up should start.