Numbers add up to vindication for a cautious gold bull

June 1, 2016 04:19 PM

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Back in early March, with the HUI screaming along north of 150, I published "Patiently Climbing Aboard the New Golden Bull," in which I opined that we had entered a brand-spanking-new bull market in precious metals and related equities. But I also noted that, with the Relative Strength Index (RSI) above 85 on the daily SPDR Gold Trust ETF (GLD) and approaching 80 on the daily NYSE.Arca Gold BUGS Index (HUI), the short-term outlook was less than appealing, while the intermediate and long-term outlook was unequivocally bullish for the first time in five long years.

When that report went out, the next 10 days was spent fending off a barrage of nasty, spiteful emails as to why the commercials no longer mattered and why the COT was a "useless tool" ("just like the author of that report"). In fact, for the next two months the COT continued to erode, with prices of gold and silver elevating modestly and with the miners going literally "vertical" as the number of "ha-ha" emails was directly proportionate to the move in the HUI. It got to the point where I was sledge hammering the liquor cabinet before lunchtime.

However, as is usually the case, the COT, while failing as a timing tool, proved to be a valuable directional indicator and gold and the miners have finally rolled over, offering me vindication (of sorts) and a chance to cover the hedges and add to my favorites patiently.

I said this would be a "nasty week" and it surely was, with mostly everything shiny under pressure. The chart below shows a clear blow-off in the miners in the move up to 236 with RSI above 70, four times between February and May with two Moving Average Convergence/Divergence (MACD) negative crossovers and dramatically weakening momentum. The HUI has broken 200 today and the gold has "given" $1,220 so the washout that I expected and which the Commercials orchestrated has come to bear and there will be more next week. (And NO—it won't be "different this time").

Silver appears to under less pressure today in the sense that the gold-to-silver ratio (GTSR) is dropping again (74.58) and that is what I wrote about back in April—you are better off buying silver than you are gold with the GTSR trading where it is. Looking out long term, you can see that silver has clearly broken the long-term downtrend line but gold still needs to surmount $1,450, the line drawn off the double tops in late 2011 and late 2012. For that reason, I believe that accumulation of the silver deals and remaining short gold versus long silver is a great way to position one's self into the May-July selloff in the metals and miners.

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