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Trading Lessons

What’s Up with the HUI and Gold ?

Commodities / Gold and Silver 2016 Jan 11, 2016 - 12:32 PM GMT

By: Dan_Norcini

Commodities

“UP” it was, but the intermediate term chart is certainly not that impressive, given the pandemonium that has been taking place since the start of the New Year.

The index does seem to have carved out a bottom just above the 100 level but it must take out initial resistance near 140 and then again above the 50 period moving average to give chartists some reason to turn more solidly bullish. As things stand now, all it looks like the index has done is to bounce off a bottom and trek higher towards to the upper bounds of a sideways trading pattern. For a bullish breakout to occur, 150 will have to be cleared.


When looking at the long term chart, (monthly), the bounce occured back at the 2002 lows. Think about that for a moment! This sector had fallen to FOURTEEN YEAR LOWS.

The collapse/annihilation that began in 2012, wiped out an entire decade’s worth of gains in less than 4 years! Methinks future investors will think long and hard before tying up precious investment capital in the miners again. Perhaps this sort of horrific price action will steer more investment capital looking to diversify into gold into the gold ETF, GLD. If one is going to buy paper gold, at least the ETF does not have inept management issues to worry about.

I have said it before and will say it again, there was NO EXCUSE for any gold mining company NOT TO HAVE HEDGED expected future production when gold broke down on its price chart in early 2013 and began a bear market. Think about the huge sums of losses that could have been avoided or at the very least minimized with a solid, well thought out and properly implemented hedging program. Instead, many if not most of them, sat through a brutal bear market completely exposed to market price risk. That is why I would never tie up my own personal investment capital in one of these mining companies unless I had assurances that they had an informed, experienced risk management department which knew how to run a hedge book. Good luck finding one of those among this sorry crowd.

The reason I harp about this is because companies that deal with commodities must understand that their product experiences ups and downs in price. There is no such thing as a stagnant price. This entails an understanding of cycles. There is a time to have a bullish outlook and a time to have a bearish outlook. Grain elevator operators, exporters, cattle feeders, packers, refineries, growers, etc, all understand that part of their business involves not just producing a product but managing price risk. Without doing so, they are unnecessarily and recklessly – in my opinion – exposed to price flucutation which can seriously impact their profitability.

Why does the gold mining industry stand out as the one which refuses to join the crowd of responsible companies? The answer is simple – most miners are great at digging stuff out of the ground and presenting reasons why their product is great. What they are terrible at is recognizing that the have a fiduciary responsibilty to protect their profits. Well run companies are NOT SPECULATORS. Specs such as myself are willing to accept price risk for the sake of making profits off of movements in price. Companies are in the business of producing a product AT A PROFIT and attempting to minimize risk. You do that by locking in profitable prices when the market gives you the opportunity to do so or protecting yourself from adverse price movements with well designed hedges. Far too many of these mining companies failed to do just that. The results of this foolhardy “strategy” can be clearly seen in their abysmal share price.

Have some of them learned? Perhaps, but under pressure from uninformed shareholders, they will more than likely have learned nothing and will repeat the same mistakes the next time around. While being unhedged during a bull market in gold can accompany a soaring share price making management look like genuises, doing so requires no great skill. As a matter of fact, it requires NOTHING AT ALL. The challenge is having your company do well during times in which the price of gold is falling. THAT takes skill and knowledge of markets – something that Barrick at one time possessed but which it allowed itself to surrender under pressure from shareholders back in the mid 2000’s.

Consider that my rant for now…

Here is a quick look at the GLD holdings.

The ETF has added 7.22 tons of gold since the start of the year. That is a good sign if you are bullish the metal. It does show that there is some Western-based investment demand stirring in the metal. This is a necessary condition for gold to continue to move higher. Should this demand falter, the metal will fall lower in price again.

Lastly, some comments on the gold Commitments of Traders data out this afternoon. Remember, this data only covers through Tuesday of this week. Gold closed at $1078.40 that day. It hit a high of $1113 in today’s session before reversing lower, a climb of another $35 since Tuesday.

According to the CFTC, hedge funds covered a total of 7606 short positions in gold, including futures and options. That is a signficant amount of buying which as stated above, does not account for an additional $35 climb higher in price. Rest assured that SIGNIFICANT amounts of hedge funds shorts were covered Wednesday, Thursday and Friday this week.

Here is a chart showing the HEDGE FUND OUTRIGHT positions and comparing those to the gold price. You can see the reduction in short positions. They did add some new long positions but by comparison to the buys associated with short covering, those were outnumbered by more than a 2:1 ratio. A careful look at the associated chart shows the red line above the blue line meaning that they were still net short as of Tuesday. That may not be the case any longer with that $35 price rise since Tuesday.

Additionally, it is interesting to note the Swap Dealer positioning on gold ( as well as the Commercials).

LAstly, you can see the short covering and reduction in the net short hedge fund position to see how that short covering is pushing gold higher.

gold hedg efund

Small specs were still net short as of Tuesday. No doubt most of them are now gone as well.

A quick look at the actual gold chart is in order.

Gold had a nice week to start off the New Year. It is interesting that this is exactly what it did last year to start 2015 as it rallied about $120 into the middle of last January before it began to break lower once more.

As noted in previous posts this week – as long as this financial stress and chaos remains in the markets – primarily with China – gold will remain well supported in price. As soon as the market comes to feel that the worst is over in that regard, gold is going to break lower. The question is when might that be? I wish I knew. The truth is not a single one of us know this. We just have to watch events unfold.

I should note here that when the strong payrolls number first hit the wires and were revealed to the markets, gold immediately came under strong selling pressure falling well below $1100.

Here is a 15 minute chart showing the sharp move lower that took gold down as far as $1091 minutes after the data hit the wirefeeds. Gold bulls should note this very well as it is a foretaste of what will happen to gold should the market come to believe that the worst is over as far as chaos in the Chinese/emerging markets. Gold will get hit and it will get hit hard. Do not forget that.

The reason is simple – that payrolls number caught a lot of people by surprise as most were looking for a good increase in jobs for December but mainly in the vicinity of 210,000. Instead we got a big 292,000. If that were not enough, November jobs were revised to +252K while October was revised to +307K. That in and of itself, would have fanned the flames of additional rate hikes coming from the Fed which would send the Dollar higher and by consequence, gold lower.

What the market did however, after this sharp selling reaction in gold and big move higher in the Dollar, was to focus back on the potential for further bad news out of China over the weekend, plus the fact that the wages number showed no upward pressure on wages. That brought the safe havens back into play again (Risk Aversion) with the Yen recovering from its losses along with gold and the bonds.

I only mention this to keep the readers soberminded so as not to get caught up in all the usual RA-RA that will now be coming out of the cult of gold. Gold is acting like it should be acting during a time of financial stress and chaos and uncertainty. If that goes away, gold will move lower as fears/concerns dissipate. Good traders will understand this and will therefore stay alert for any signs of stability or lessening of investor worries.

In other words, DO NOT GET MARRIED TO GOLD. It is insurance. Remember that, stay objective and be soberminded. Leave the wild-eyed gold cult to glory in its own rantings.

Dan Norcini

http://traderdan.com

Dan Norcini is a professional off-the-floor commodities trader bringing more than 25 years experience in the markets to provide a trader's insight and commentary on the day's price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world including the grain and livestock markets. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal's commodities section. Trader Dan has also been a regular contributor in the past at Jim Sinclair's JS Mineset and King News World as well as may other Precious Metals oriented websites.

Copyright © 2016 Dan Norcini - All Rights Reserved

All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The information on this site has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any information on this site without obtaining specific advice from their financial advisor. Past performance is no guarantee of future results.

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