One of our favorite indicators has flashed a “Buy” signal.
Gold, along with most other precious metals, has been getting clobbered during the past couple of weeks. Not coincidentally, our indicator of the gold market has dipped down to a level typically seen just before a moderate to good rally in gold prices. This trade can play out over a period of just a few weeks if there is a sudden jolt higher in the price of gold. But the more profitable trades usually come from a slow bubbling up of prices over a handful of months.
The indicator – as well as the price of gold – can continue pushing even further into “oversold” territory before reaching its final bottom. That might be what happens this time around. The market is all atwitter about a “death cross” in gold. The death cross nonsense will only add to the panic in the market, providing even better prices for the more clever traders. Yesterday’s close at $1588 should prove to be an advantageous entry point, however.
And don’t forget about silver. Being more volatile, silver often is the better performer when gold is advancing.
Even among those who are bullish on gold, there is often a debate about whether it is better to buy the metal itself or to buy shares of the miners who dig it out of the ground. Or if there are times when one is better than the other. Today we will provide another way of looking at it by comparing the SPDR Gold Trust ETF, better known by its ticker symbol GLD, and the Direxion Gold Miners bullish ETF with symbol NUGT.
What we are doing on the chart below is to divide the value of NUGT by the value of GLD. (The two ETFs are also plotted individually below the relative strength line.) When the resulting line is rising it means the gold miners ETF is outperforming the metal, and when the line is falling it is underperforming. The gold miners ETF is triple leveraged while the gold bullion ETF is unleveraged. But that is not important for this exercise. What we are interested in right now is the interplay between the relative strength line and the lower Bollinger band. And because the leveraging of NUGT is fixed at 3X, it is possible to compare the number of standard deviations from the mean at different points in (recent) time.
Specifically, what we see here is the classic pattern of the thing being measured making a series of lows below or near the lower band and then another low point comfortably within the bands. It is premature to say for sure that a turning point in NUGT versus GLD is at hand. But if it is going to happen, this is a likely place for it. One way to play it is to take a small position now and then add to it if/when the ratio goes above its 20-day average for two consecutive days.
The last two years have not been kind to the palladium market, as evidenced by the accompanying chart from Kitco. Many precious metals, including gold, have been in a consolidative mode during this time. But palladium has been particularly weak, and it struggles to avoid making multi-year lows.
We mention all of this as a way of introducing a weekly chart for North American Palladium (PAL). It is one of only two miners whose primary business is palladium. The other is Stillwater Mining (SWC). On the chart of PAL, below, you see the long-term downtrend in the company’s shares. Of particular interest to us, from a technical analysis perspective, is the possible double-bottom on the right hand side of the chart.
The second bottom in a double-bottom can be either above or below the first one. But it almost certainly will occur within the Bollinger bands. If PAL prices should tag that lower band again, then we would expect lower prices to come. So the first thing we would want to see here is for prices to turn up without any further violent downward thrusts. Any possible enthusiasm for PAL, however, is mitigated by the performance of Stillwater’s shares (included as the third panel in the chart below). Unlike its competitor, SWC is not threatening new lows. For the past year, it has performed much better than PAL.
Shares of PAL may in fact be making a low here. Just be aware that you are buying the weaker of the two stocks.
It may sound counter-intuitive, but you can learn alot about the future direction of gold prices by looking at ETFs that invest in gold. Tom McClellan first circulated this idea a year and a half ago, and today we will update and revise it. McClellan’s name might look familiar to you. His father, Sherman, created the McClellan Oscillator and the McClellan Summation Index.
The SPDR Gold Shares trust, the popular exchange traded fund known better as GLD, currently owns more than 40 million ounces of gold. By watching the total amount of the metal held by GLD, you can reliably identify low points in the market price of gold. [McClellan included GLD's younger sibling, IAU, but watching only GLD works just as well.] When the amount of gold owned by the fund falls by 2% or more over a period of 10 days, the price of gold usually hits bottom. There is nothing magical that happens at exactly 2%, so maybe the recent figure of -1.91% is close enough to mark a low point. The chart below illustrates the relationship over the last two years.
Let’s try putting some trading rules around this. The idea here would be to take the low hanging fruit. We will buy gold when the amount of gold in GLD decreases as described above. And we will sell when the amount of gold in the fund increases by 2% or more in 10 days, or after 3 months, whichever comes first. Unfortunately, we do not know how much gold the fund owns until after the market closes in New York. So we will use the next day’s London PM Fixing price for our entry and exit prices.
This strategy would have generated five trades in the last two years. The returns, not including trading costs, are: +13.8%, +13.3%, +5.6%, +0.2%, and +7.3%. The average holding period is 51 business days, or about two and a half months. If we had allowed the recent “close enough” entry point, we would be in at $1572. This very non-optimized strategy holds up well going back even more than two years, but it does break down during the fund’s early years when it didn’t take much to cause a big percentage change in gold in the vault.
Coal miner Cloud Peak Energy (CLD) presents us with a glass-half-full or glass-half-empty situation. Some optimists out there might feel that CLD is in the process of basing, as price volatility quiets down. But we do not see it that way.
We see a stock where the bulls have been steadily losing their enthusiasm. Starting with the lows formed along with the overall market in early October, there have been four attempts at rallying the troops. And each one ends with less progress made in terms of prices. To take a more bullish view, we would want to at least see better volume on the up thrusts. But in fact volume picked up only after the fourth and most feeble rally attempt.
In each of the last two trading days, prices reached $19.75 early in the day. But the bulls quickly retreated. Clearly, they are not in control here. Indeed, CLD has been underperforming the Market Vectors coal ETF (KOL) for the last month and we expect that trend to continue.
We last wrote about Molycorp (MCP) just before it reported earnings in November (see Dirty Harry And Molycorp). We visit again today after spotting both bullish and bearish fundamental analysis recently on the Seeking Alpha website. And, besides, MCP is an interesting stock to trade.
We noticed that for the last 5 months the direction of MCP shares has closely tracked the direction of gold. Maybe the market does not care about Molycorp’s individual fundamentals.
We noticed also that Molycorp is not a gold miner. We even reviewed the company’s most recent earnings conference call and the word “gold” never came up. They do extract many rare and sometimes unpronouncable things from the Earth. You might think that cerium, neodymium, and dysprosium would be somewhat uncorrelated with gold. Molycorp’s rare minerals have purely industrial uses, while gold’s value is influenced by industrial, monetary, and some would say religious aspects. Nevertheless, the market is moving both of them together.