Tuesday, November 4, 2014

Gold vs. the gold miners:

According to Elliottwave International Elliott waves often correct in terms of Fibonacci ratios. They explain in their new eBook How You Can Use Fibonacci to Improve Your Trading, which explains what you can expect when a market begins a corrective phase.  The classic Fibonacci retracement percent number (%R) is 61.8% but 50% and 100% (not Fibonacci #’s) are common.

Basically a retracement is a correction that follows a meaningful advance as illustrated in our chart – monthly data displaying gold and the gold miners’ rebound from the 2008 financial crisis lows to the 2011 price peaks and the subsequent correction expressed as per cent retracements. The bearish 2011 – 2014 stampede away from the gold miners has been extreme as measured by the collapse back to the October 2008 lows – back when we had $700 gold prices. The question here is that who is wrong – the gold miner bears (a bearish stampede) or the gold bulls who have not capitulated. Yesterday I observed many candlestick bullish reversals on the gold miners.

Next post: Crude vs. the energy producers.


Shawn Severin said...

As you have said in the past Bill, "the companies lead the commodity". I think the complete obliteration of the mining complex suggests that much lower gold prices are in the near future (i.e. a return to $300 / oz eventually). To quote Warren Buffett, "Gold doesn't do or produce anything. People buy it hoping that the next guy will pay more for it than they did.".

We're in the early phase of a secular bull market in US equities with a focus on healthcare & technology. Best to focus on this. The commodity bull market ended in 2011-12.


Anonymous said...

Shawn, I don't think that would happen because the cost to produce an ounce of gold is about $1,000. The big miners like GOLD CORP and BARRICK can do it cheaper but from what I've read, it is too costly to get the stuff out of the ground, so if the cost of an oz drops below the cost of production, then miners close and supply shrinks and that drives prices higher.


Shawn Severin said...

Hi Mike,

Global gold supply is extreme relative to demand. Gold is stored in vaults all over the world as hard currency. Supply / demand characteristics are irrelevant when considering the price of gold - but what does determine the price of gold is psychology and sentiment (i.e. perceptions about inflation, fear, etc.). I personally think gold is worth very little (i.e. 10 / oz). Aluminum was the most valuable metal in the world before electrolysis was discovered. Now we throw it away as tin foil. Gold is a useless metal and has no industrial use. It's glitter will wane and someday will be worth less than aluminum.