Speculators are not buying this top in S&P 500. According to the COT report, they are actually decreasing their net positions in S&P 500 futures:
Look at the chart above. The area marked in yellow indicates a period when speculators were increasing their long positions (26.9 thousand fresh contracts were added) on S&P 500. Shortly after this period there was a minor correction in prices. Then the index continued its march up.
Now we are encountering a different pattern. Although the index made a fresh top, speculators are currently decreasing their long positions. Last week they were even net SHORT the S&P 500 - look at the chart below:
Generally such pattern precedes an incoming weakness in stock prices. Whenever we see (areas marked in yellow):
- speculators shorting the index
but
- stock prices still going up
a substantial correction is expected.
The first chart shows the old GLD picture:
Well, it looks terribly now. The amount of gold in GLD vaults is going down sharply and GLD prices broke below their strong support at 115. This is the chart for gold bears.
Now, the chart for gold bulls:
It is a little bit complicated so let me explain.
The upper panel shows gold prices. The lower panel shows the US dollar index. For better comparison, I have plotted an inverted version of the US dollar index.
As a rule, both charts should perform in the same way. If gold goes up the inverted US dollar goes up as well (and the "right" US dollar index goes down).
That is theory. However, it is the divergences that count. The first divergence occurred between March and December 2015 (points A and B). The US dollar index had the same readings at point A and point B but gold had not. Gold was lower - I would say that the gold sentiment was negative : although the US dollar did no change its value gold was weaker.
Now, look at the point B and C. Most recently the US dollar goes up strongly (and the inverted variant of greenback goes down). The point C is lower than the point B.
However, and that is the argument for gold bugs, now gold at the point C is higher than at the point B. Generally, it should also be lower but...it is not. I would say that the sentiment among gold players is now positive.
Here is the chart showing drilling companies and their relative performance:
There are two leaders: Geodrill (Western Africa) and Orbit Garant (Canada).
On the other hand - look at Energold. The company is going steeply down.
Selling pressure in gold continues. For example, GLD investors are still decreasing their long positions in gold:
Last week GLD was reporting reductions in gold holdings each trading day. Let me list these gold outflows:
November 14: 181 thousand ounces
November 15: 48 thousand ounces
November 16: 38 thousand ounces
November 17: 181 thousand ounces
November 18: 172 thousand ounces
As the chart above shows, the old pattern of holding the unchanged amount of gold in GLD despite lower prices of gold, was violated last week.
Simply put, American investors are not perceiving lower prices of gold as a buying opportunity . Quite contrary, it looks like they are panicking.
The same pattern is delivered by the COT report - speculators are selling gold. I was curious about speculators after the election week. Here is the answer - they decreased their long position in gold futures by 40 thousand contracts:
However, note that each time the selling pressure, demonstrated by speculators, reached its climax the prices of gold were bouncing up next week - look at the circles plotted on the green bars (big reductions in net positions held by speculators) and the accompanying circles plotted on the price chart (bottoms in gold prices).
Summarizing - the selling pressure in gold is still intact but the next week may be positive for gold bugs. I would say that the next two weeks (the next week is very short due to Thanksgiving Day) will be very important for gold bugs. Look at another chart:
As the chart shows, the prices of GDX were relatively stable last week (they even went slightly up). Note that both gold and silver prices went down last week. In other words, precious metals stock prices were not following gold and silver last week, which may be indicative of the dissipating selling pressure in the gold sector.
Looking at both charts (GDX and COT Report) I think that the incoming two weeks should clarify the whole picture.
Last but not least. The US dollar.
The chart shows that something strange is happening here. The speculators are reducing their long positions held in US dollar futures. Look at the green bars - last two weeks these bars were negative, which means that speculators were decreasing their net long positions. It looks like they are starting to bet that the bull market in the US dollar has ended. It is a chance for gold bugs.
The US dollar is strengthening and gold goes down. However, the chance is here:
Now the US dollar is approaching its strong resistance at around 100. Since early 2015 the greenback was bouncing off any time it approached the upper line, marked in yellow.
It is a chance for gold bugs... but if the resistance is broken - I will have to revert to the plan B.
Yesterday GLD reported an outflow of gold from its vaults. Now the well-known chart looks as follows:
It looks like the American investors are panicking. On Monday, despite lower prices of gold (or, better said, because of lower prices) they decreased their gold stakes by 181 thousand ounces.
On the other hand, last week's COT report shows quite strange thing. Last Wednesday, the day after the election, the American speculators increased their net long positions in gold futures:
Look at the small, green bar on the right - the net long position increased by 2,107 contracts.
However, I guess it is only a part of the story. The most interesting data is still undisclosed - I mean a period between November 10 and today. It will be disclosed in the next COT report so....we have to wait.
Despite tanking gold and precious metals stock prices, the mineral drilling sector (represented by the DRILL index - the line marked in violet) performs very well.
Last week it broke above an important resistance level (the line marked in red) and continues marching up:
The green, dotted line represents the relative strength of the drilling sector against GDX. Since the beginning of the current bull phase in gold cycle the DRILL index has been much stronger than the precious metals sector itself.
However, as usually, the main question is "what is leading and what is lagging?"
In the past it was the drilling sector that was leading...
I realize many gold bugs are wondering what is going on. Well, the market is terrible now. Everything related to gold is going down. More, it is plunging.
Here is a chart showing the price action of gold:
Since its peak in July gold prices has lost 11.1%. Generally, it is not too much (11% correction in commodity markets? - Negligible...) but tell it to somebody who bought at the top...
Next, since its start in early 2016, the bull cycle in gold corrected around 50% (gold went up from around $1,070 to $1,380 and then lost half of the entire movement). It is quite a usual correction - nothing special in commodity markets. But tell it to somebody who bought at the very top....
Now, let me look at GDX:
The line marked in blue indicates the up sloping trend line and the line marked in red represents the downward trend. Keeping things simple, the upward trend should renew when GDX prices break the line marked in red. Now we are quite far from that point.
O.K. I am a gold bug but I have to have a plan "B". My plan B is that I will become very cautious if:
- gold prices go below $1,200 (the green horizontal area on the first chart)
- GLD investors start to decrease their gold holdings below current levels (see the chart below)
Now the well known chart of GLD:
On November 11 investors decreased their gold holdings by another 229 thousand ounces but the long-term chart still looks nice (gold prices going down but GLD holdings relatively unchanged). It does not look like a distribution. But tell it to somebody who bought gold at the top...
Summarizing - I do not think that from now on we will see only large drops in prices of gold and precious metals stocks. However, I would expect a lot of volatility in the coming days. But until GDX prices break the downward trendline to the upside we are still in the correction mode in precious metals stocks.
On such a market a careful stock selection is a key. The chart below shows how the stocks included in my Top Five Picks performed since inception (December 16, 2015):
Note that GDX (red horizontal line) returned only 48.9%. The overall return delivered by the portfolio is 132% at the moment (to compare, S&P 500 returned 4.4%).
Yesterday I reported that investors added fresh ounces to GLD vaults. Today I see that they decreased their stake by 429 thousand ounces (quite a lot).
Well, it looks like a roller coaster.
However the big picture remains unchanged:
As the chart shows, gold continues its correction but the amount of gold at GLD vaults is, generally, unchanged since early July.
Today Richmont Mines released its 3Q 2016 report. The results were, more or less, in line with my expectations. They were to be worse and...they were worse. I remind my readers that in my previous articles I noted that the second half of 2016 was going to be worse (for example, this article).
However, it looks like somebody does not read this blog and today Richmont shares dived 16%:
It looks like a catastrophe but the entire precious metals market (excluding silver) today looks like a disaster. However, there is no disaster at Richmont.
The company is very busy with going deeper at its flagship property, Island Gold. As a result, Island Gold goes not so fast as before. For example, in 3Q 2016 the Island Gold mill processed only 58.8T tons of ore, while in 2Q and 1Q 2016 it was milling 79.9T and 75.9T tons of ore, respectively.
Lower throughput = higher costs. Add to that the increased exploration (Island Gold) and you have relatively high costs:
As a result the company became unprofitable in 3Q 2016.
What next? The management is confident that the guidance for 2016 is going to be met so 4Q 2016 should be much better than 3Q. But remember, 2H 2016 will be poor.
The divergence between the prices of gold and silver is extending:
At the time of writing gold is 1.3% down but silver is 0.4% up.
Well, generally gold and silver go in tandem. If the prices diverge it is only a question of time when the old relationship is re-established.
However, the question is: which metal is leading? If it is gold so a huge slump is coming. And vice-versa...
Yesterday's election spree was a buying opportunity for gold investors. Not caring about huge price volatility they added 171.6 thousand ounces to GLD vaults.
Look at the chart below. It shows that lower prices of gold (the line marked in green) are considered as a buying opportunity. Since early July the price of gold went down around 7% but GLD holdings are, more or less, at the same level (the line marked in red):
As Erich Maria Remarque once said: All quiet on the Western front"
Some people say First Majestic is overvalued and over promoted. Maybe they are right (especially when over promotion is concerned) but the company shows steady progress. Let me show just one chart:
The chart shows production and profit margins calculated on a per quarter basis.
Note: profit margin is calculated as follows:
revenue less operating costs less smelting and refining expenses
Note that this year is exceptional for the company. Not only it increased its production but, due to higher silver prices and lower costs of production, it improved its margin.
Last but not least - today First Majestic shares are trading at an EV/EBITDA multiple of 14.2. It is not an elevated level...
Today Banro released its 3Q 2016 report. Below you will find the chart showing the performance of the oldest mine, called Twangiza:
As the chart shows, Twangiza is deteriorating. Despite higher gold prices received, the margins demonstrated by the mine are going down.
Why? Here is the answer:
Simply put, grades and recovery ratios are going down. As a result, margins are going down as well.
Somebody could say that over time every mine is deteriorating. Yes, but Twangiza is a relatively new operation. It is too early to deteriorate so much....
It looks like another buying opporunity for gold bugs:
Gold (the line marked in red or violet) goes steeply down but the ratio Silver / Gold (black and blue) goes steeply up.
Such a divergence is indicative of an incoming change in gold prices (to the upside).
And neither Donald nor Hillary have anything to do with it...
In addition to my article on Fairfax 3Q 2016 results (published on Seeking Alpha) here is a chart showing what Prem Watsa's investment policy is about:
I guess many gold bugs are wondering what is going on. From a micro ultra short - term perspective, gold is going up or trading sideways but GDX or GDXJ do not follow it.
For example, today GDX is losing around 2% (GDXJ is 2.2% down at the time of writing) but gold prices are generally unchanged (now they are 0.1% up). Here is the answer:
and here:
Simply put, a bunch of deep pockets is trying to scare the gold bugs. They do it in the most primitive way it can be done, which means that the fight is around the 50-day moving average (does anybody care about the 50-day moving average? I do not).
My advice is simple - let them play what they have to play. That is how this market works so...do nothing.
Today B2 Gold announced its 3Q 2016 results. Let me show two charts:
The chart shows cash flows from operations (excluding working capital issues), presented on a per quarter basis. Note that in the period between 2Q 2015 and 4Q 2015 the company was able to increase its cash flow (green arrow) amid lower prices of gold. Really excellent performance...
How did they do that? Well, look at this chart:
The answer is: cost cutting.
Since the beginning of 2015 B2 Gold's management has cut costs of production from around $1,200 per ounce to around $900 per ounce. Nice job, gentlemen...
And now, when gold prices are higher, is the time to make profits. And B2 Gold does it.
