Winding our Way to a Golden Bottom (IBB, GDX, GLD, SLV)

Winding our Way to a Golden Bottom (IBB, GDX, GLD, SLV)

The last time Wall Street Elite readers were treated to a discussion about gold was two weeks ago, when we closed out a profitable trade on the miners.

When we set the trade we were skeptical about the yellow metal’s prospects over the near term, and in the end we were proven right. We sold a set of naked PUTs on the Market Vectors Gold Miner ETF (NYSE:GDX), and when August options expiry rolled around we were rewarded with a 100% gain on the premium we took in.

Since then, there haven’t been great moves in the price of bullion itself, but with every passing day a depressed price of gold does force the mining community to consider the viability of its current portfolio of operations and the need, potentially, to shutter those that can’t deliver profitably in the current depressed price environment.

Short the Miners!

 

Not so fast, Lucas.

We’re not sure a short bet on the miners is presently in order. In the first place, the miners have a far better technical profile than does bullion, both gold and silver, which is one reason why we’re cautious about taking any position on them now, either long or short.

To be specific, there has been tremendous turnover in both the mining and junior mining spheres over the last 16 months, a development that ostensibly speaks to a bottom for the sector.

Look here –

GDX91
This is the last four years weekly trade for GDX.

As mentioned above, the chart gives great hope to the gold mining bulls, who’ve watched their shares lose ground for the last three years exactly.

The hope comes especially by way of expansive volume figures since early summer, 2013, which speak to a period of accumulation for GDX – stronger hands ready to swoop in vulture-like and scoop up the issue at a relatively cheap price (blue square).

RSI and MACD indicators (in black) also support the bulls’ position, both having bottomed and turned higher well before the price lows of December 2013, creating a meaningful divergence from price.

Fly in the Ointment

 

But could price still turn lower from here?

Why, of course.

But what about all that volume and the divergence you spoke of?

Well, first, the divergence can break down with any price move lower. And volume can always be outdone by greater volume, which could well come into being if GDX were to make another (final?) leg down.

That is to say, we may not have seen absolute capitulation from the miners as yet. If gold bullion were itself to move lower and the subsequent shuttering of less profitable mines were, indeed, to take place, we could well see another round of deep selling on GDX before she’s brought to her final resting place.

WGC Stats

 

According to the World Gold Council, bullion at roughly $1,100 would force just such a stock-taking among the major producers, all of whom are scrambling to keep their all-in sustaining expenses below the $1100/oz. level.

But could that happen? $1,100 an ounce gold?

It’s not out of the question.

Take a look at the following weekly charts of both the SPDR Gold Trust ETF (NYSE:GLD) and the iShares Silver Trust ETF (NYSE:SLV), both good proxies for their respective metals –

GLD912

As you can see, both gold and silver have traced out giant, one-year descending triangle patterns (in black), what technicians view as a continuation formation, providing more grist for the bears’ mill. Most chartists will pile on the short positions on any break below the bottom black line.

Along with that, SLV is below all of her moving averages, all of which are also in the process of unwinding lower (red circle, at bottom).

GLD’s price is doing slightly better technically, trending below all but one of her MAs but, significantly, has yet to touch her long-term moving average (in yellow), a development that we believe is inevitable, though it’s unclear when exactly that will occur (red arrow at top).

Most damning, however, is the complete absence of any selling climax on either metal (in blue), a sure sign for people like us that lower prices lay ahead.

Let’s look now at GLD’s shorter-term (daily) chart to get a sense of where she’s headed next.

gld13

According to the existing daily technicals, gold has little to commend it. RSI and MACD are both underwater (in black), and price is now trending below all four salient moving averages (blue circle), each of which is also descending, though they aren’t quite fully unfurled. Should we have additional weakness this week, we might see a complete unfolding of all the MAs within the next six to eight trading sessions.

That would surely drive a spike into the heart of the gold chart, but what might bring it about?

Two things, principally.

First, a strong dollar. Second, a strong equity market.

gottemboth

The dollar has been on a tear of late and is showing little sign of faltering. After climbing above all its moving averages it appears we’ve entered a new era – however long or short it may be – for dollar enthusiasts.

And while it may not end well, in the meantime it’s likely to tap the final nails into the precious metal coffin.

Look here –

dxy
We may see some backing and filling as the dollar index returns to test support at 81.25, but what’s more important is the move above all the MAs, a development we haven’t seen on the dollar chart since last September.

That’s the dollar.

Now check out the following response to a poll taken by the Gallup organization

preference

When asked what they’d do with an extra 10K, a plurality of investors would choose to plunk it down in equities. And while it’s not yet an outright majority, it’s a far cry higher than it was a year ago. The other 59% will climb aboard eventually. When it’s almost too late.

In the meantime, the money is flowing into stocks; with new highs being registered nearly every week and foreign investors increasingly taking larger positions. That’s what’s pressing the buck higher and what should continue to depress the precious metals.

Closing One Down

 

On July 21st, in a letter called To the Risky Go the Spoils, we recommended a two way trade on the iShares NASDAQ Biotech ETF (NASDAQ:IBB), which we expected subsequently to whipsaw around like Linda Blair’s Exorcist head.

But it never happened.

[mepr-rule id=”994″ ifallowed=”hide”][mepr-unauthorized-message][/mepr-rule] 

[mepr-rule id=”203” ifallowed=”show” description=“wall_street_elite_members_only”]
We told you to buy the IBB August 230 PUT for $3.50 and sell the August 225 PUT for $1.85 for a debit of $1.65. Then we recommended you buy the IBB September 275 CALL for $2.00 and sell the September 285 CALL for $0.55, for a debit of $1.45. Your total debit on the trade was $3.10.

The PUT side never materialized, but the CALLs produced.

We’re therefore obliged to close out now and take whatever we can.

Wall Street Elite recommends you consider selling the IBB September 275 CALL for $5.80 and buying back the September 285 CALL for $2.40, for a credit of $3.40.

That gives you a $0.30 profit on the trade, or 9.6%.
[/mepr-rule]

[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]
We told you to buy the IBB August 230 PUT for $3.50 and sell the August 225 PUT for $1.85 for a debit of $1.65. Then we recommended you buy the IBB September 275 CALL for $2.00 and sell the September 285 CALL for $0.55, for a debit of $1.45. Your total debit on the trade was $3.10.

The PUT side never materialized, but the CALLs produced.

We’re therefore obliged to close out now and take whatever we can.

Wall Street Elite recommends you consider selling the IBB September 275 CALL for $5.80 and buying back the September 285 CALL for $2.40, for a credit of $3.40.

That gives you a $0.30 profit on the trade, or 9.6%.
[/mepr-rule]

Better than dying of thirst in the desert.

With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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