The Ghost of GLD Ghosts Past

A happy New Year to all. Let’s get straight to business.

We’ll start with the golden delicious – what appears to be a bounce in the precious metals that has many people wondering if we’ve seen the bear’s bottom.

On the bullish side, the chart shows the SPDR Gold Trust (NYSE:GLD), a decent proxy for the metal, moving higher over the last few sessions, and her Relative Strength Index (black circle, at bottom) ascending above its midway waterline.

But beyond that, there’s little on offer that’s positive.

We still have all the moving averages unfurled and trending lower, including the no-nonsense 137 DMA, which has proven itself an indomitable line of resistance for the last twelve months (in red). So even if the move has another five percent upside from here, we believe it will meet with a freight train’s worth of selling when it encounters the 137 DMA.

Moreover, there’s absolutely nothing in the volume figures that would indicate we’ve seen a bottom (in blue). For the last six months we’ve seen declining volumes for GLD, precisely the opposite of what’s expected at a major market turn.

MACD (at bottom, in black) has also yet to confirm RSI’s bump above the waterline, and even with positive price action, would still be a week or more away from surfacing itself.

All of which leads us to believe that, at best, we’re witnessing a minor retracement within a larger move down. If you want to bet on it, you can, but you run a big risk, because it could be sharp and quick and over before you have a chance to close out any position that’s profitable.

But what about gold (GLD) futures…?

That said, many among the smart set are pointing to diminishing speculative volumes in the futures pits as a sign that something genuinely bullish is afoot here. And we believe that’s worth a brief discussion.

The chart shows unequivocally that the excitement over gold that obtained for the last four years has burned itself off to the point of being all but extinguished – certainly a positive omen for gold speculators, no?

But remember – this chart is net longs less shorts, and does not show overall trading volumes, while GLD, the precious metals vehicle for common louts like us, clearly indicates that a selling frenzy (of even the most modest dimensions) has yet to occur.

So while the bigwigs have apparently reduced their speculative hold on the metal, the average ham and egger is far from following suit.

Our conclusion: don’t buy in just yet.

But How Could it Be!?

We received an intelligent piece of correspondence last week that we’d like to share with you. It pertains to the precious metals and comes from a subscriber who wonders why we believe gold still has room to fall while silver’s bottom is already in.

Are you really saying gold down 25%, and silver going up? Why such a divergence, when they usually move reasonably closely? That means gold about 40X silver, compared to about 67X now.
The gentleman’s reference to a 25% drop in gold comes from our feeling that gold will retrace to its Fibonacci support level in the $900 zone. And while we never said silver would rise from here, we’ve long since believed the summertime lows would hold.

Take a look at spot silver for the last year. She’s still holding above her summertime lows, though not by a great margin, so it would be natural to think that she might tumble alongside gold should the latter retreat in earnest.

But as the chart below shows, silver has led the metals both higher and lower for the better part of the bull, so it wouldn’t be an extraordinary occurrence for her to do the same now.

Gold has had a delayed bear market vis-à-vis silver, both in terms of its start date and its downward velocity. And we say it’s still playing catch-up.

GLD Mirrors SLV Mirrors GLD

As to our friend’s assertion that gold and silver move in close relation to one another, it’s certainly true – except at the extremes. When gold topped in September, 2011, the gold/silver ratio was 44x. When silver topped in May of that year, the ratio was a measly 29x.

So there’s certainly nothing extraordinary about a 40x ratio that seemed so outlandish to our reader.

The Truth is in the Trade

Truth is, we don’t have the guts to make a bearish bet on silver right now because as bad as it’s been for as long as it’s been, it still has far more going for it technically than gold – and could spike at any moment on even a mild move higher from the latter. Most formidably, it appears that SLV’s 137 day moving average, while still descending, is now flattening. And that’s as dangerous an omen as there is for the bears.

That’s not the case for either gold or the miners, though. And here we disagree with the world famous Michael Kahn, high priest of the market technicians over at Barron’s, who recently opinionated that a turn in the tide for the precious metals was very possible, according to his reading of the charts.

Eek! There is no bottom here, Michael. And your read on the Market Vectors Gold Miners ETF (NYSE:GDX) is egregiously ass-backwards. There ain’t no divergence there.

Gold is going nowhere, folks, and we’re selling CALLs to pocket some premium.

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How?

The safest way to play it is by selling the near term expiry at the strike that’s situated just above the descending 137 day moving average. That would be the January 125’s, expiring in ten days.

Options Trader Elite says – consider selling eight January 125 CALLs, each now trading for $0.30, for a total credit to you of $2.40. Dump them immediately should GLD touch the 137 DMA.

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With kind regards,

Hugh L. O’Haynew
Senior Analyst
Normandy Research

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