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    - Interim Update 10th September 2014

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The Stock Market

The US stock market, as represented by the S&P500 Index (SPX), is not accelerating upward, but it is also not managing to 'correct' in any meaningful way. It seems that the 'dip buyers' now view any minor decline as a new buying opportunity.

It has now been almost 22 months since the S&P500 Index last pulled back enough to touch its 200-day MA. This means that even if the bull market is destined to extend well into next year, a sizeable correction is way, way overdue.



The Bank Index (BKX) is now in an interesting position. It has failed to confirm any of the new highs made by the SPX since March, but is now very close to a breach of resistance that would very likely be followed by a move to new highs for the year. This means that we are about to get either a downward reversal in BKX and a decline to test the bottom of the contracting range drawn on the following daily chart, or an upside breakout that brings the BKX into line with other important US stock indices.



Gold and the Dollar

Gold

Current Market Situation

The gold price broke below its short-term channel bottom during the first half of this week and is now closing-in on important lateral resistance defined by its June low ($1240).

We have no opinion on whether the above-mentioned support will hold. From our perspective, the optimum price action over the days ahead would involve a break below $1240 that was reversed within two days. The reason is that false (quickly negated) downside breakouts are reliable bullish signals.



Like the gold market, the silver market is close to important support. However, whereas the gold market is closing-in on intermediate-term support, the silver market is now very close to long-term support.



Silver isn't likely to begin its next tradable rally until after gold begins to rally, and, as noted in a previous commentary, the start of a tradable rally in gold probably requires the removal of the downward pressure being exerted by the S&P500's relentless upward trend. To put it another way, the next upward reversal in the gold market will probably occur within a few days of a downward reversal in the US stock market.

Retail buying of gold coins is almost always insignificant

A recent Mineweb article points out that year-to-date sales of US-minted gold coins have declined almost 54% compared to the same period last year. If they were consistent, the analysts and commentators who argued that last year's robust sales of coins to the US public was an important bullish factor would now be arguing that this year's lacklustre sales figures are a bearish factor. But that's not what they are doing. Instead, they are looking for other irrelevant pieces of information to support their bullish views.

In reality, the number of gold coins purchased by the public is never an important influence on the gold price, one reason being that the quantity of gold involved is always trivial relative to the size of the market. For example, the amount of gold minted globally into coins is running at around 3M ounces per year, which equates to about 10,000 ounces per business day. The amount of gold traded via the LBMA on an average day is about 2,000-times greater and the amount of gold covered by futures contracts traded in New York on an average day is about 7,000-times greater. Even the amount of gold backing the GLD shares that are traded on an average day is about 70-times greater than the global daily volume of gold minted into coins.

The bottom line is that when trying to explain what the gold price did in the past and what it will likely do in the future, it is safe to ignore the quantity of newly-minted coins sold to the public.

Actually, all transaction volumes can be ignored, whether significant in the context of the overall market or not. This is because with every transaction necessarily involving a buyer and a seller, the transaction volume will always say nothing useful about overall demand. To put it another way, every transaction involves an increase in demand on the part of the buyer and an offsetting decrease in demand on the part of the seller. This means that only the change in price can tell us whether buyers are more or less motivated than sellers, and, therefore, whether overall demand is rising or falling.

Gold Stocks

Current Market Situation

Last week's downside breakout in the HUI created a short-term chart-based target of 215-220. The top of this range has been reached, but at this stage there is no evidence that a bottom is in place.

With the help of the following chart, we point out the potential similarities between the downside breakout of the past week and the downside breakout that occurred in May. Notice that a short-term bottom was put in place only 2-3 days after May's downside breakout. In this case, the break below support led to a quick washout decline and an upward reversal.

Something similar could certainly be 'in the works' right now. If so, a bottom would be put in place within the next couple of days, probably at around 215.

However, the chart also reveals a significant difference between the downside breakout of the past week and the May breakout. We are referring to the fact that the May breakout was not confirmed by the GDXJ/GDX ratio (when the HUI plunged below support to a new multi-month low in May, GDXJ/GDX made a higher low), whereas last Thursday's downside breakout was confirmed by a new multi-month low in the GDXJ/GDX ratio.



The GDXJ/GDX ratio is the most important short-term indicator for the gold sector at this time. Rather than trying to forecast when the next multi-week rally would get underway, over the past few weeks we should have simply waited for a signal from this ratio. There will likely be a very sharp rise in this ratio at the beginning of the next tradable rally, just as there was in late-December and early-June.

A few words about moving averages (MAs)

MAs are not natural support/resistance levels. They are simply trend-smoothing devices. However, the most widely-followed MAs often act as support and resistance because many short-term traders place orders near them. The gold sector's recent price action provides these examples:

1) Last Friday's intra-day HUI low was 0.03 points above the 200-day MA

2) Tuesday's HUI close was 0.01 points above the 200-day MA

3) Tuesday's intra-day HUI high was 0.03 points below the 50-week MA

Gold-mining CEOs are generally clueless about gold

The CEOs of commodity-producing companies are usually knowledgeable about the supply of and the demand for their company's products, but gold-mining CEOs are exceptions. The vast majority of gold-mining CEOs have almost no understanding of supply and demand in the gold market.

For example, like most gold-market analysts and commentators, most gold-mining CEOs wrongly believe that the change in annual gold production is an important driver of the gold price. In particular, they talk about "Peak Gold" as if a leveling-off or a downward trend in global gold-mine production would be very supportive for the gold price. This means that they don't understand that the gold-mining industry's contribution to the total supply of gold currently equates to only 1.5% per year, and, therefore, that changes in industry-wide gold production will always be dwarfed -- in terms of effect on the gold price -- by changes in investment/speculative demand. (And by the way, changes in investment/speculative demand cannot be quantified by looking at transaction volumes.)

Gold CEOs' general cluelessness about the gold market is reflected by the performance of the World Gold Council (WGC). Every year, the WGC produces a pile of completely irrelevant information about the gold market.

Fortunately, understanding the gold market has nothing to do with being a good CEO of a gold-mining company. A good gold-mining CEO is someone who a) implements strategies that keep total costs at relatively low levels, b) prudently manages country, local-community, environmental and other political risks, c) ensures that the balance sheet remains healthy, and d) only makes acquisitions that are accretive.

The Currency Market

The British Pound's price on the foreign exchange market has obviously been pushed down by the uncertainty stemming from next week's referendum on Scottish independence. The Scottish referendum could also have contributed to the euro's recent downside 'overshoot', because a "yes" vote, which started to look more likely over the past week, could a) set in motion a chain of events that lead to a UK exit from the European Union, and b) encourage secession movements in other European countries. That's why the political and financial establishments have been blowing the risks of Scottish independence out of all proportion. The goal is clearly to provoke enough fear to prompt more than 50% of Scottish residents to vote "no".

We will write more about the upcoming Scottish referendum's likely effect on the British Pound in the Weekly Update. Suffice to say at this time that we do NOT believe that a "yes" referendum outcome would be significantly bearish for the Pound beyond short-term sentiment-driven fluctuations. We therefore think that a further sharp sell-off in the Pound following a victory by the pro-independence movement would create a good opportunity to begin accumulating an intermediate-term 'long' position in this currency.

Updates on Stock Selections

Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html

 
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