The US$ gold price has essentially gone nowhere in a boring way over the past 2 weeks, which probably means that a sharp 1-3 week move is about to start. The question is: In which direction?

Obviously, no one knows the answer to this question. The most we can do is look for clues in the price action.

On the minus side, gold closed below its 20-day moving average (MA) on Monday 20th April. This was the first daily close below this MA since mid-March and in isolation would be a sign that the price was rolling over to the downside. On the plus side, however, the price managed to hold at the 50-day MA on Monday. More importantly, the gold-stock indices made small gains despite an $8 decline in the gold price. This small bullish divergence between the bullion and the mining stocks tilts the odds in favour of the next $30+ move being to the upside.

Here are the relevant charts:

1. The first chart shows that gold has near-term resistance at $1210. A daily close above $1210 would suggest that the price was headed to at least $1230 and possibly as high as the $1280s.

2. The next chart shows that the HUI has managed to hold last week’s minor upside breakout, but has more resistance at 180. There is near-term (1-3 week) upside potential to 195.

3. The final chart paints the most bullish picture.

Gold’s true fundamentals (the fundamentals that many gold bulls studiously ignore as they instead choose to fixate on irrelevancies such as the amount of gold being imported by China) are neutral and gold/euro does not yet appear to be close to completing the intermediate-term correction from its January-2015 ‘overbought’ extreme, so the start of a major gold rally is probably not imminent. In other words, if the recent choppy price action leads to a quick advance over the next couple of weeks it probably won’t mean that we’ve seen the last opportunity to buy gold below $1200.

There’s an old saying that goes something like: If you owe the bank $100K and you can’t pay then you have a problem, but if you owe the bank $100M and you can’t pay then the bank has a problem. This saying applies to the current negotiations between the Greek government and the other euro-zone (EZ) governments regarding the Greek government’s ability to obtain additional support from its official-sector creditors. In particular, it explains why the governments of Germany, France, Italy, Spain, etc. are very keen for Greece to remain part of the EZ.

The following table shows the official-sector EZ exposure to Greek government debt. More specifically, the table shows the direct and indirect (via supranational organisations) financial exposure of each EZ member state to the bonds issued by Greece’s government. Total exposure amounts to about 330B euros, with individual exposure typically being in the 3%-4% of GDP range. In nominal euro terms, the states with by far the biggest exposure are Germany (92B), France (70.3B), Italy (61.5B) and Spain (42.3B).

If Greece leaves the EZ and the Greek government defaults on its debt, how will the political leaders of the remaining EZ members explain the resultant hit to their taxpayers? If they were honest (which, of course, they aren’t), the explanation would be along the lines of:

“On my watch we transferred an amount of money equivalent to more than 3% of our country’s GDP from you, the taxpayer, to various programs designed to bail out your counterparts in Greece. Actually, that’s not true. Far from being bailed out by the money transferred from your good-selves, the Greek government was saddled with a vastly greater debt burden and Greece’s economy was pummeled further into the ground. It was actually the private holders of Greek government bonds who were bailed out. Why? Well, in my defense, Greece’s economy was in the toilet anyway and I was advised that there would be a euro-zone-wide financial crisis if the bond-holders weren’t bailed out. I’m aware that the current crisis is much worse than the crisis we avoided by implementing the bailout, but there’s no point crying over spilt milk. So, please let bygones be bygones and vote for me anyway.”

The desire to avoid having to make a sanitised version of the above speech will be a powerful motivator as Greece-related deadlines approach over the weeks immediately ahead.

The following charts relate to an email that will soon be sent to TSI subscribers.

CHART 1 – THE US$ GOLD PRICE

CHART 2 – THE HUI

CHART 3 – THE HUI/GOLD RATIO

CHART 4 – THE NYSE COMPOSITE INDEX

CHART 5 – THE CANADIAN DOLLAR

This post is a slightly-modified excerpt from a recent TSI commentary.

If you are speculating in gold-mining stocks it is important to have your eyes wide open and to not be hoodwinked by the pundits who argue that the current low prices for these stocks imply extremely good value. The fact is that at the current gold price not a single senior gold-mining company is under-valued based on traditional valuation standards such as price/earnings and price/free-cash-flow. Also, while some junior gold-mining companies are very under-valued, most are not. In other words, the low price of the average gold-mining stock is not a stock-market anomaly; it’s an accurate reflection of the performance of the underlying business.

The relatively poor operational performance of the gold-mining industry is not something new. It is not something that has just emerged over the past few years or even over the past two decades, meaning that it can’t be explained by, for example, the advent of ETFs (the gold and gold-mining ETFs actually boosted the prices of both gold and the stocks owned by the ETFs during 2004-2011). The cold, hard reality is that with the exception of the banking industry, which usually gets bailed out once per decade at the expense of the rest of the economy, since 1970 the gold-mining industry has wasted capital at a faster pace than any other industry. That’s why the gold-mining-stock/gold-bullion ratio is in a multi-generational decline that shows no sign of reversing.

It’s certainly true that a lot of money can be made via the judicious speculative buying of stocks in the gold-mining sector, because these stocks periodically generate massive gains. It’s just that in real terms (relative to gold) they end up giving back all of these gains and then some.