Tuesday, March 5, 2013

HUI Gold Bug Index - A New Line in the Sand (?)

It has always intrigued me how various moving averages, trend lines drawn on price and even trend lines drawn on technical indicators seem to have an almost magical spell over the ensuing price movement. This post will show you a new trend line that has appeared on the weekly price movement of the HUI Gold Bugs Index and I suppose we could think of it as the next 'line in the sand'. Whether there is any magic with this particular line is something we will all find out and soon.

We'll take a look at this trend line from a distance and up close, as well as take a peek at some new True Strength Index (TSI) indicator adaptations I have developed specifically for looking at the HUI Gold Bugs Index, and conclude with a chart and thoughts regarding the price movement of the Gold Futures (/GC).

I found this new HUI trend 'line in the sand' on the weekly chart when using the setting for log scaling. The endpoints are the 2000 and 2008 lows and the line is simply extended after 2008.

Click on any chart to ENLARGE
A little later we will take a closer look at this chart on the daily time frame to see just how close price is to reaching this trend line. 

But before we do I think the weekly TSI (7,4) shown in the lower indicator panel (above) is interesting. It shows the 4 most extremely negative momentum readings of the HUI in the past 15 years - 2000, 2004, 2008 and 2013. 

Our current reading, at -85.11, is a record breaker. Can you say 'over sold'?

And I think the appropriate question when looking at this information is whether these 4 extremely and historic readings were good times to BUY or good times to SELL? (Read my mind if unsure of the answer).

Here is a closer look at HUI using a daily chart with the trend line rising in blue in the lower right corner. It appears price is just a matter of 5-10 points from reaching this trend line at 335.0. The TSI indicator shows that a "picket line" BUY signal has been setting up for a while, but we are not quite there yet.

The following couple of charts of the HUI display a couple of customized uses of the TSI indicator. The top indicator panel shows the TSI (25,13) of each mining stock (16) that comprise the HUI index. The lower indicator panel considers the movement of each stock's TSI - whether rising or falling and whether above ZERO or below ZERO - and by assigning a different value for each condition a histogram is plotted.

If all 16 stocks have a TSI that is both rising and above ZERO, the histogram reaches +32. For the opposite condition, -32. 

Here is the weekly, followed by the daily.

And finally, here is a chart of daily gold futures (/GC). The TSI (7,4) is set up nicely for a trend line break BUY signal with a modest uptick in price.

The most recent Commitment of Traders (COT) reports regarding gold have been extremely interesting and have an explosive component already loaded and locked into place. You have the smartest of the bunch, the commercials, positioned for gold being at the bottom of this lengthy correction. They are hedgers by nature and quite literally always net short of gold.....but it is the degree to which they are short that tells their story. At present their net short position is minimal and very similar to their correct positioning at the 2008 bottom. The commercials have apparently seen no reason to increasingly hedge their long positions with gold in the $1575 area. Which is also to say that they are not terribly concerned that gold is going much if any lower.

Meanwhile we have the Managed Money group who has had a considerable long gold position for some time but recently has been adding thousands and thousands of shorts to their position. They have not been selling their long contracts - rather they have been hedging their long contracts with these shorts, presumably on the fear that if the bottom falls out at $1523 their long positions will be protected. Perhaps we could think of their excessive short positioning as 'enthusiastic insurance' purchases. 

And a post or two back I noted that when this group (Managed Money) has built a huge short position they have always done so at exactly the wrong time.

So picture this. The commercials are the ones, if anyone, who actually have bullion. Do you seriously think the Managed Money group has any bullion? I didn't think so.

So when the Managed Money dopes find out gold is not going below $1523 what do you suppose they are going to have to do with all those shorts they own? Do you think they will deliver the bullion when their contracts are closed or do you think they will become buyers of more paper gold on the long side to cover?

Right. They will become the perfect fuel in the incinerator that burns short paper contracts into charcoal. And all the other groups, including the commercials, will turn up the heat and watch them wither and crackle in the flames. This is the kind of unusual setup that causes those explosive blasts upwards in price one notices once in a while, seemingly for no reason. It is temporarily caused by a lack of liquidity - there are so many shorts running for the door to sell their paper that only when price is 'favorably adjusted upwards and immediately' do the shorts get their trade covered.

It is a bull market, after all. Patience!


  1. John, I surely agree with the analysis. I have been wondering what the gold turn will look like. Often it has been fast and furious. You would think it would be this time given the COT data. But downward momentum has been so intense, it might take a lot of false starts before an upward trend is established. I wonder what you think the bottom will look like.

    Also, what will be the trigger? Will we have to wait for the s&p and the dow to turn down? Will it be a turn in the dollar? Or none of the above.

    Thanks for sharing your thoughts.


  2. Nice work! Thank you!

  3. Interesting that as of last night, HUI is right at 61.8% Fibonacci retracement. A

  4. John,
    I admire your ability to scrutinise data to the degree that you do.
    It is especially true when the outcome of the analysis supports your investment agenda and logic.
    I don't for one iota believe the data is managed to suit/fit your thesis. It is what it is and legitimately works v. well.
    I must admit that it has been far too long for this nonsense of price suppression (via paper market) to be played out. In saying that and with great respect for your key points raised above (both fundamentally and technically) we should be there....however the phrase " but we are not quite there yet" still IMHO rings true.
    We are either on the cusp of the next great upswing in the Gold Bull or we will continue with a protracted consolidation possibly until we have a stock market correction.
    What is of particular interest/concern though is with new highs and increased liquidity....where is the place to seek refuge / safety when risk is a concern.....usually the USD and Treasuries. Gold is again not participating. BUT IT WILL....we both know that. Time now is of the essence...NOT TIMING.

  5. This is a fun game, even if expensive sometimes....

  6. I would be very nervous about holding gold now but for two reasons. First, central banks promise to crush their currencies, and continue to do so. Second, the east seems prepared to buy all the gold the west is prepared to sell. Given your excellent analysis, today I'll be adding to my position. Thanks!

  7. Joe - without a crystal ball, your excellent questions are impossible
    for me to answer other than to offer speculation. My speculation is that
    when this turns it will be an explosive move higher. V shaped, in other
    words. The trigger will be when we run out of committed sellers. This will
    happen when they somehow get it through their heads that gold is not going
    any lower. Then it will be panic - but in the bullish direction. The smart
    money is already positioned for this new "reality" so I suspect the show
    is about to begin.

  8. Liquid Motion - well said. I would add that investors holding long at this point are easily through the worst of it in terms of both price depreciation and time. I don't worry about this situation whatsoever but instead recognize it as the process that squeezes out everyone possible and prepares for the next huge leg upwards.

  9. aklaunch - expensive sometimes, true, if one has a short time horizon and gets caught on the wrong side of the trade - as I am at present. Fortunately, if one makes an adjustment to the longer time horizon and is positioned in alignment WITH the bull market and not opposite it, incredibly it is true that the experience is never expensive, only profitable.

  10. Randy - the two reasons you cited to be nervous about holding gold are two of the best reasons for holding gold - just the opposite of your reasoning, in my opinion. Would you be interested in developing those two thoughts a little further and discuss them?

  11. Hi John,

    Thanks very much for your detailed analysis.

    Regarding Randy's comment, I believe his intention was favorable for gold for the two reasons he mentioned. Perhaps it would have been more clear if Randy would have stated:

    "I would be very nervous about holding gold now except for two reasons".

    Just trying to help stimulate more great dialog about gold. Also, anyone follow Sandstorm Gold Ltd (SAND)?

  12. John, I think Randy said that he would be nervous about holding gold EXCEPT for the 2 reasons given.

  13. Yes. I follow SAND. I know nothing about its fundamentals, but a couple of oscillators including TSI have given buy signals although a confirmation by MACD has not occurred. Because of my bad experiences recently, I have decided to buy on a pull back only after a higher low and a higher high have been established. I'm waiting.

  14. I stand corrected and did misunderstand Randy's thoughts. Thank you for the correction.

    SAND - I know nothing about. Never heard of it. On daily it has a TSI (7,4) trend line break BUY signal which follows a positive divergence BUY signal of 3 days ago. Price is holding just above the 100 wma. Looks like a strong stock.

  15. Hi John,

    A scary article - Louise Yamada’s “Technical Perspectives” report.


    I wanted to share this with you. If you care to comment.


  16. A - thank you for sharing this link. It was interesting to see
    an accomplished technical analyst ply her skills to the gold
    and silver charts. I found her observations to be well reasoned
    and I certainly respect her thinking.

    A few quick thoughts come to my mind. First, as she is thought of
    by many to be one of the darlings of Wall Street, it is all the more
    understandable that the Managed Money hedge funds would listen to
    her analysis, believe it, and pile on the shorts.....to their peril,
    I may add.

    Second, a technical analyst is only concerned with offering a reasonable
    explanation of the data on a chart. They are responsible for suggesting,
    from that point of view only, the *odds* that price is headed one way or
    the other. And, as playing in the stock market is indeed a game of playing
    the odds and rarely a game of playing certainties, technical analysts can
    often accurately forecast these odds....which, while reasonable, get it
    wrong by light years. Nobody can really fault them as their analysis usually,
    but not always, gets it right.

    And thirdly, I recall watching LY on TV a few years ago. I was intrigued by
    the clarity of her thinking and the soundness of her reasoning. I think her
    talk was about HPQ or some other large high tech company. So following this
    experience of watching the master show her skill which elicited oohs and aahs
    from the Fast Money Traders and such, I decided to keep an eye on how things
    played out for HPQ. And I clearly recall, a year or more later as her analysis
    concerned a 'bigger picture' view of this stock's likely future price movement,
    was that her conclusions turned out to be DEAD WRONG. (Not that this doesn't
    happen to me once in a while :-)

    Conclusion: her reasoning is very good, but I am not impressed. The Managed Money
    boys can act on her analysis, but not me.