Trader’s Narrative

While we’re on the subject of seasonality and how September is the albatross around the stock market’s neck these days, I’d be remiss to not point out that what has been historically negative for equities has been a boon for gold and gold stocks.

Last year, I also pointed out the positive seasonality of gold in September (and the remaining months left in the year). But, as measured by the Philadelphia Gold Bugs Index (HUI) gold stocks didn’t follow their historical path and finished the month pretty much unchanged. However, in mid-September there was a rally that took the Gold Bugs index 35% higher within the month.

In any case, here is a chart of the monthly performance of gold for the past 5 and 15 years:

If you compare this chart with a longer duration seasonality chart you’ll notice that during this current super-bull market for gold (which started in 2000) seasonality has shifted slightly. For these most current years (red line) there are really two big waves of positive seasonality for gold and gold stocks. The first is about to start while the second comes after a correction in October and lasts from mid-October to February of the following year.

Here’s a chart of the Gold Bugs index with the past two September’s and this year’s marked by a green arrow:

I didn’t bother marking the obvious triangle pattern that has formed in the gold stocks index. Prices are getting coiled into a spring and will potentially break out. However, over-head resistance is just 100 points higher at 475-500 - where the Gold Bugs index hit a wall early last year.

Remember, seasonality, while having a powerful and undeniable influence, is a secondary driver of prices. It is more helpful to think of it as context for the actual analysis of trend.

Here’s a chart of an index of stocks which recently rallied more than 65%. Can you guess which one it is?

For the answer keep reading…

Continue reading ‘Guess Which Index Rallied 65%’

Isn’t gold supposed to be a haven in times of stress? you know, real money? What happened then? why didn’t gold skyrocket to $2000 oz.? if it isn’t going to go up when the world’s financial market is in meltdown, when is it going to go up? The answer deduced from market history is that gold’s role as a safe haven is simply a myth.

It speaks to gold’s weakness in this market that it bucked the seasonality trend that I pointed out for the month of September. The AMEX Gold Bugs Index (HUI) - the only index which is comprised of only gold stocks - started and ended September at pretty much the same level.

My favourite indicator to time the gold market is the k-ratio. To understand how, check out the previous link. Here is a long term chart:

The k-ratio held almost constant, treading sideways for five years as both the numerator, gold stocks, and the denominator, gold prices, kept pace with each other. Because I was using this indicator to time the gold market, I lost some money because I didn’t see a fundamentally attractive opportunity at those prices. While it was painful to watch this historically reliable indicator, it has once again proven its merit. This is probably what people went through when it continued going lower and lower in the late 1990’s and 2000.

So what accounts for the collapse of the k-ratio? While gold has fallen around 4% for the year so far, gold stocks have fallen almost 50%! Believe it or not, that’s actually more than the equity market (S&P 500 Index). A large part of this is probably due to the forced liquidation that we witnessed in the markets last week.

Ironically, now that gold equity prices have fallen this much, the k-ratio is at levels last seen in late 1998 to 2002 - when the gold price was ~$250! The current gold price is more than 3 times that.

The AMEX Gold Bugs Index (HUI) has strong support at 175, which would mean the k-ratio to the low 0.20’s and once again, it could set up as a buying opportunity. I really don’t think we’ll revisit the lows that the k-ratio set in 2000 because that was due to a huge asset dislocation (thanks to Greenspan’s bubble).