The time has finally arrived to step up to the plate and buy some beaten up gold stocks. I’ve been waiting for what seems like an eternity for the long term charts on gold to turn more bullish after a gut wrenching fall over the past year.
I’m going to stick my neck out and say that moment has arrived.
The first thing I needed to see was for the weekly MACD to cross above its signal line. You can see from the chart below that the last two times we saw the weekly MACD cross its signal line from below zero the gold price took off to the upside over the next few months.
The first time was actually the beginning of a huge leg up in gold after the crash in 2008.
I also wanted to see a weekly close in the gold price above the 10-week moving average. I currently have the 10-week moving average sitting at US$1319 and yesterday’s rally in the gold price took it to US$1330 and above.
If prices can hold above the 10-week MA this week then it will increase my conviction levels that gold has seen an intermediate bottom.
Gold stocks saw good buying across the board yesterday. Silver Lake Resources (SLR), Troy Resources (TRY), Perseus Mining (PRU), Medusa Mining (MML), Kingsgate Consolidated (KCN), Gryphon Minerals (GRY), Resolute Mining (RSG), Newcrest Mining (NCM), Ramelius Resources (RMS), Saint Barbara Mines (SBM) and Oceana Gold (OGC) were all up by more than 7% yesterday.
The Aussie Gold Miners Index (XGD) is looking particularly interesting on the weekly chart. The thick blue line in the chart below is the low in the XGD after the crash in 2008. The false break of that low could prove to be a great buying opportunity in gold stocks for the long term. At the very least we should see a bit of a bounce in gold stocks in the short to medium term if we get the weekly close above that level.
Another thing that has me interested is the fact that Newcrest Mining (NCM) announced a horrible annual result yesterday with a loss of $5.78 billion but spiked higher by 8% over the day. In other words, investors have now taken into account the bad news and they’re now looking forward to the future rather than fretting about the past.
There has been a lot of press lately about the fact that the GOFO (gold forward offered rate) has gone negative. The Gold Forward Offered Rate (GOFO) is the rate used for gold/U.S. dollar swap transactions.
That is, if you own gold and you need to borrow dollars, you can use your gold as collateral and pay a much smaller rate of interest to borrow the cash than otherwise. This is a common transaction in London. The LBMA (London Bullion Marketing Association) publishes the GOFO daily.
A 10 July article on Seeking Alpha said that:
‘The only reason a negative GOFO would occur is if someone desperately needs to get their hands on gold but thinks they’ll be able to return it within the time frame of the loan. A negative rate out to three months tells us that there’s a big delivery shortage and bullion banks or large investment funds are willing to pay an interest rate to borrow gold and put up dollars as collateral.‘
If some big investors are finding it hard to get their hands on physical gold then we shouldn’t be surprised to see the gold price starting to catch a bid. A negative GOFO rate is a bit of a canary in the coal mine that something big could be happening behind the scenes that we aren’t privy to.
You’ve probably heard the conspiracy theory that traders took down gold over the past year to shake as many weak hands out of physical gold as possible. It has also been pretty clear that demand for physical gold has actually been skyrocketing the lower prices have fallen. Not really what you would be expecting to see at the end of a bull market.
Gold stocks have had one of the biggest crashes I have seen in many years. The Aussie Gold Mining index fell from 8,500 to 2,000 in a little over two years. That’s a fall of 76% in the whole index in 26 months! Quite extraordinary.
With margins dropping to zero for most gold stocks we’re either heading to a situation where gold mines will begin to get mothballed or gold prices will have to rise to a level where production can continue to fulfil demand. In either situation we should be getting close to a low in gold prices, because if a lot of production goes offline then prices should naturally rise.
Any gold stock that’s producing in the bottom quartile and priced on the current razor thin margins has got to be looking pretty cheap right here.
It’s pretty clear from yesterday’s price rises that other investors are starting to think the same thing. The opportunity is still there but it won’t last forever.
Murray Dawes+
Editor, Slipstream Trader
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