 Gold and HUI
Carnage?
Adam Hamilton
Archives
January 12, 2007
This young New Year has not
been kind to gold and gold stocks. In the first six trading days
of 2007, general commodities selling pressure pushed gold down
3.9% which in turn drove the HUI unhedged gold-stock index 8.6%
lower. Such ominous beginnings have led to a growing crescendo
of pessimism chilling the hearts of investors and speculators.
It is not at all unusual to
see the mainstream Wall-Street types that CNBC interviews bearish
on gold. They will always hate gold since the conditions in which
secular gold bulls flourish lead to poor general stock-market
performance. But it is fairly rare to see the contrarian community
on the web, including some long-time gold bulls, waxing pessimistic.
Over the past week I have received
a bunch of e-mails from Zeal subscribers concerned about the
rampantly proliferating bearish technical analysis on gold. Many
of them ask me what I think of other analysts' analyses and conclusions.
Since the endless challenges the markets themselves present are
enough to keep me busy studying for dozens of lifetimes, I don't
have time to critique the work of others. But you can do it yourself
from the comfort of your own computer.
If the work of some analyst
seems particularly compelling to you today and is generating
concern, I humbly suggest checking his track record at the last
two major turning points in gold. The massive gold upleg that
ended last year started near July 2005 and ended in May 2006.
The right calls to make at these pivotal times, of course, were
to be very bullish in late summer 2005 and very bearish in late
spring 2006.
If your analyst was right at
both of these key inflection points, the two most important
of the last two years, then he is probably worth listening to
today. How can you tell? Google his name along with the word
"index", like "Adam Hamilton Index". The
top link will probably be that analyst's page on the excellent
Gold-Eagle.com, the
oldest and most venerable contrarian gold portal on the web.
Gold Eagle went live way back in 1997. Over the last decade it
has done a fantastic job building the biggest contrarian commentary
archive on the internet. [Barb's comment "No comment."]
If you do this exercise, and
read exactly what analysts said publicly right at gold's last
major interim tops and bottoms, you will probably be surprised.
You will find out that very few analysts are true contrarians,
who were very optimistic on gold when it was plumbing dismal
lows and very pessimistic on it when it was achieving exciting
bull-to-date record highs. Being a contrarian is hard work for
an investor, but probably even harder for an analyst.
Why? Most non-Wall-Street analysts,
including me, sell newsletters to finance their analytical work.
There is tremendous pressure to reflect popular sentiment
rather than fight it. You have to be a real black sheep and glutton
for punishment to tell euphoric investors at a top that a sharp
correction is due. Whenever you do this, tell people what they
don't want to hear, you irritate them and lose subscribers and
revenue.
Thankfully I have never had
a high personal need for acceptance, which means I am not in
the business of pleasing others. It is doing the right thing
that motivates me. So taking all the flak and losing business
by being truly contrarian at the inflection points doesn't bother
me. I was publicly bullish
in late summer 2005 and publicly bearish
in late spring 2006, and traded accordingly. The hate mail
these correct decisions generated at the time is no big deal,
just part of the game.
Speculation is an incredibly
demanding endeavor. The markets take all of our own personality
flaws, especially emotional weaknesses, and throw them back in
our faces to try and break us. Trading contrary to your own emotions
and contrary to the consensus sentiment of others is unbelievably
difficult. Yet this is what must be done in order to ultimately
prove successful. There is no other way.
So today, when I survey the
gold world, it is really exciting to see almost everyone bearish
and depressed. At turning points the majority is always wrong
because most people extrapolate existing trends out into infinity,
a fatal error in perpetually cyclical markets. So when the financial
media and even the usually bullish web community join forces
in trafficking in myriads of bearish gold theories, odds are
a fantastic buying opportunity is near.
People are bearish today simply
because gold has struggled in early December and early January,
five weeks at the most. That this utterly trivial span of time
is apparently enough to spawn widespread fear boggles my mind.
Secular commodities bulls tend to run for 17 years in history,
so why fret about adverse price moves over 1/200th of this time
span? And the really ironic thing is gold's retreat lately is
totally trivial and minor anyway.
In this essay I want to offer
an unpopular contrary opinion on gold, to explain why I remain
extremely bullish today for this bear-dominated sector.
There is absolutely nothing that has happened in the last five
weeks, both fundamentally and technically, that warrants such
widespread pessimism. If you are willing to throw off the tyranny
of being influenced by others' emotional weaknesses, I think
you'll agree gold looks like it is in the early months of a major
new upleg.
Truly the fundamental front
is the most important, the global supply and demand dynamics
affecting the gold price. If you are concerned about the state
of this gold bull, I strongly urge you to go read an essay I
wrote several weeks ago on gold's
fundamentals. They are dazzlingly bullish today, there is
no doubt about it. Today's gold fundamentals are identical to
those that existed in summer 2005 before gold launched its greatest
upleg of this bull that earned fortunes for astute contrarians.
But it is not a fundamental
attack on gold that is driving the incredible bearishness today,
but an attack on its technicals. Pure technical analysts who
refuse to study the fundamental side of gold as well as its price
action seriously hobble their own ability to think clearly. The
greatest danger for technicians is to consider too short a period
of time, to lose focus on the crucial big picture and get mired
down in trivial short-term details.
I have seen such short-sighted
technical analysts, just in the past week, use words like "carnage"
and "crash" and "downward spiral" to describe
the price action in gold and gold stocks. Frankly such assertions
are just plain silly. When considered in proper strategic context,
gold's move lower so far in 2007 is tiny and immaterial on the
charts. Note below that gold has fallen steeper and faster than
it has in this past week around a half dozen times since its
latest interim top in May.
If technicians want a real
plunge in gold, all they have to do is look back to the blistering
21.9% and $158 plunge over one trading month in May and June.
Now that was something to be concerned about! Yet in the first
six trading days of this year, gold is just down 3.9% and $25.
A $25 plunge in a $600 asset is "carnage"? Give me
a break. Anyone who has weathered the worst corrections gold
has thrown at us since 2001 wouldn't even raise an eyebrow at
a 3.9% selloff.
As near as I can tell, technicians
are freaked out about the real plunges in oil and copper over
the past week and they are transferring these fears to gold.
While oil, copper, and gold are all commodities, neither their
bull markets nor all of their key fundamental drivers are the
same. Gold's secular bull started years after oil's and years
before copper's, it is a very different beast. Sometimes gold
runs parallel with either oil or copper, and sometimes it doesn't.
The global investment market for gold is totally unique and is
not dependent on other commodities.
So if you want to analyze gold,
don't get bogged down in peripheral events like fears of a slowing
US housing market hurting copper demand or fears of scarce oil
miraculously flooding the markets. Gold needs to be considered
on its own since it has totally unique investment and
monetary merits unequalled in any other commodity or asset on
the planet. If gold's
fundamentals remain intact, and they do, the only question
is whether gold is a good buy or not right now technically.
My charts in this essay encompass
the last two years. Back in early 2005 gold was in a healthy
consolidation after achieving a bull-to-date record high near
$455 in late 2004. After major uplegs all bull markets consolidate,
and trade sideways, or correct, and trade lower, in order to
rebalance sentiment. People get too euphoric near tops so sideways
or lower trading is necessary to bleed off this greed as well
as to get traders comfortable with considering the new higher
price levels as normal.
Consolidations and corrections,
especially once they mature, offer fantastic buying opportunities.
Technically they drag bull-market prices back down near their
200-day moving averages, which are usually the best places in
long-term bulls to add new long positions. At Zeal we use some
moving-average-based indicators to help us decide when corrections
are mature and the time to aggressively buy again is near.
The first is rGold, gold divided
by its 200dma. This is the red line above. It expresses gold
as a constant multiple of its 200dma over time. This creates
a horizontal trading band where gold's 200dma remains at 1.00
while rGold oscillates above and below this in its major uplegs
and corrections. One of the reasons I was bullish in late summer
2005 when most analysts were reflecting the popular bearish sentiment
of the time was because rGold was under 1.00.
We have a big long-term rGold
chart posted on a private area of our website for our subscribers,
and on it you can easily see that without a doubt the very best
times to buy gold in the last five years were when it was under
its 200dma. This Relativity
trading theory is very simple, yet very effective due to
the mathematical way in which bull markets advance. After gold
languished under its 200dma in the summer of 2005, it launched
on its mightiest upleg we've seen in decades. It was awesome!
Well, guess what. Today as
technicians jump on the short bandwagon playing the short-term
downward momentum in gold, it is once again under its 200dma.
It was also under its 200dma earlier in September and October
which is when we started layering in new gold-stock trades at
Zeal. So far the early October $560ish levels look like a major
interim bottom, and I really doubt gold will fall lower as the
groupthink bearish hordes are screaming for now.
Today gold is once again under
its 200dma which is running near $620. If this secular gold bull
remains intact in fundamental terms, then this could very well
prove to be the last great buying opportunity of this young upleg.
As I have traded every single upleg of this entire bull, I know
full well it is totally normal for the majority of market participants
to be bearish at just the wrong time. True contrarians have always
been and always will be exceptionally rare since it is such an
unnatural mindset to cultivate.
A second indicator we've used
at Zeal considers the relationship of gold's 50-day moving average
with its slower-moving 200dma. The really cool thing about the
Gold 50/200 MACD is it doesn't turn very often. So whenever its
slope does turn from negative to positive or vice versa, it usually
means a major new upleg or correction is in progress. I wrote
about this
indicator in depth a couple months ago.
Back in the late summer of
2005, when most everyone was bearish, gold's 50/200 MACD turned
higher again. It started climbing in an upslope after recovering
under 1.00 on the chart. And along with this pivotal technical
event gold stealthily entered its mightiest upleg we've seen
in this bull market. The sub-1.00 Gold 50/200 MACD slope recovery
offered strong confirmation that a new upleg was almost certainly
in progress despite the naysayers.
Fast-forward to today where
gold bears are once again breeding like rabbits. In November,
for the first time in over a year, the Gold 50/200 MACD once
again recovered under 1.00 and started trending higher as you
can see above in the light-blue line. In this entire gold bull
to date, there has never been a false positive on this indicator
for a new upleg. So since it is turning north again from under
1.00 after a consolidation, then the odds are very high that
a new upleg is already underway.
I look at technicals like these,
and think about the general negativity surrounding the early
days of all of gold's major uplegs, and the only logical conclusion
I can reach is to be very bullish today. Gold's fundamentals
look gorgeous, it just ended a correction in October and remains
well above those lows despite recent weakness, and both rGold
and the Gold 50/200 MACD are in super-bullish positions right
now. It's time to be aggressively long!
Investment and speculation
are probabilities games because no mere mortal can see the future.
To win an odds game, you have to bet when the odds are wildly
in your favor. And today they look wildly in our favor in gold.
Only a small fraction of traders can fight their own emotions
and ignore the crushing peer pressure of the thundering herd
at such times, and they ultimately earn huge profits for their
steadfast contrarianism.
Although there is no carnage
in gold, it looks great fundamentally, technically, and sentimentally,
the argument for HUI carnage has a little more validity. As this
next chart shows, the HUI broke farther under its 200dma than
gold and has fallen much more steeply. Gold-stock investors and
speculators are obviously spooked as they have been liquidating
positions since early December. Are the pure chart guys right
in fearing this?
I don't think so for three
reasons. First, it is not the gold stocks that drive the gold
price but the gold price that drives the gold stocks.
If gold is really in the early months of a major new upleg and
is destined to head higher, then the gold stocks will
follow. Because people are so skeptical of new uplegs early on,
usually the HUI
lags gold considerably early on in major uplegs then rockets
higher later to catch up with and ultimately exceed gold's gains.
And not only is gold the key
to the gold stocks' fortunes, but gold stocks have wonderful
leverage which amplifies the gains and losses of gold.
Overall through their respective bulls to date, the HUI has risen
996% and gold 183%, so gold stocks have leveraged gold by 5.4x.
Traders, of course, love this leverage to the upside but have
to realize it is a double-edged sword. When gold falls, gold
stocks amplify its downside too.
Considered in this context,
the HUI's 14.1% pullback since December 4th is fairly typical
relative to gold's almost congruent 6.4% pullback. The HUI's
recent 2.2x downside leverage is actually moderate, since on
average the HUI has leveraged gold's downside by
4.1x during its major corrections in this bull to date. In
fact, the HUI's low downside leverage in the past month or so
provides more peripheral evidence that we have merely witnessed
a minor pullback within an upleg and not a new correction.
Finally, I don't think the
recent HUI "carnage" is anything to fear because today's
very negative gold-stock sentiment is typical of what shows up
early on in a new upleg. Since most traders aren't and cannot
be contrarians by definition, the fact that the majority is bearish
suggests we are in a young new upleg. Traders tend to have the
most doubts, fears, and angst after corrections and consolidations
because they make the common mistake of extrapolating recent
short-term trends out into infinity.
You've probably heard the classic
market aphorism that "bull markets climb a wall of worries".
This is so true in gold and gold stocks too. Literally every
step of the way since April 2001's $255ish multi-decade lows,
there have been countless bearish theories expounded on about
why gold should head lower. Many were even logical and compelling
at the time. Yet they've all been dead wrong. Today's
popular bearish fears will almost certainly meet the same fate.
In reality, the vertical wall
of worries facing gold and gold stocks today is really fantastic
news. Why? It means that this gold bull market remains young
in a secular sense. Remember back in 1999 in the NASDAQ when
every single pullback was widely heralded as a wonderful opportunity
to "buy the dips"? In mature bulls near their ends
everyone has bought into their stories to such a great degree
that they can't imagine them ever ending. Thus the proverbial
wall of worries vanishes near the ends of secular bulls.
Yet in gold and gold stocks
today, most people see pullbacks not as buying opportunities
but as dire harbingers of spirals lower to come. Technicians,
wanting to do the comfortable thing and reflect sentiment rather
than fight it so they don't irritate everyone, fan these bearish
flames. Pretty soon nearly everyone is whipped up into a fearful
frenzy and they expect gold to crash. This type of thought pattern
doesn't occur in mature bull markets.
At Zeal we absolutely love
times like these when fear abounds. They are the very best buying
opportunities possible within secular bull markets. We have been
aggressively adding high-potential gold-stock positions in both
our monthly
newsletter and separate weekly
alert service. If this new upleg indeed accelerates higher
soon as I expect it to, our subscribers are going to earn phenomenal
returns. It is not
too late to join us as you can still exploit these lows.
A few weeks ago we finished
a comprehensive fundamental-research study on junior gold stocks,
and wrote up profiles of our 20 favorites in a new report. This
research is fueling the higher-risk component of our new gold-stock
campaign. Since it takes months to research to this depth, we
were really blessed that we finished just as junior gold stocks
are getting beaten to a pulp by the panic fleeing on myopic technical
advice. If you want a shot at buying these elite juniors today
while they are still very beaten down, buy
our latest fundamental report today.
The bottom line is there really
hasn't been any carnage in gold and the HUI. Ultra-short-term
crowd-momentum-following technical analyses are stirring up fears
and leading people to be scared, but the reality is pretty benign.
Pure technical bearish groupthink is always witnessed near major
interim lows, this is nothing new.
If you can dig deep down and
fight the bearish consensus, and objectively view gold holistically
by integrating its broader fundamental, technical, and sentimental
health today into one coherent strategic picture, then you'll
probably reach the conclusion that gold's bull remains alive
and strong. But only true contrarians will realize this in time
to reap the biggest profits, everyone else is forced to play
catch-up later.
Adam Hamilton, CPA
January 12, 2007
321gold
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