A New Index and a New Indicator

When analyzing gold stocks, I try to look at as many indexes as possible. Some indexes that I watch are the HUI, the XAU, GDX, and XGD.to. The advantage of this is that occasionally one of these indexes will give a heads up not provided by another index.

An example of this happened on Monday, where XGD formed a text-book shooting star, while GDX closed very strongly that day. GDX gapped down on Tuesday, and closed about 2% lower that day.

I was browsing StockCharts.com's public chart list the other day. One of the lists that I appreciate there is from a man named Robert Cote. He had an interesting chart of index that I was previously unfamiliar with called the Dow Jones United States Precious Metals Index. The ticker symbol for this index is $DJUSPM. Below is a weekly chart of it:


Notice that, as shown by the yellow rectangle drawn, that resistance turned into support, and that support later flipped to resistance again. (For anybody interested in drawing semi-transparent zones when annotating charts, you press the CTRL botton on your keyboard while drawing shapes. It took me 6 months to figure this out.)

Anyway, beneath the candle chart is a new indicator. I attempted to explain the mathematics behind this indicator here. In a nutshell, it simply tells you how far, on a percentage basis, the price of a security is from its 50 period moving average.

In general, stocks tend to regress toward the mean, and when prices become very distant from the 50 period moving average, it indicates that there is risk in holding that stock. In the above chart, when the index becomes 30% higher than the 50 week moving average, that seems to show that prices have gone up too far too fast, and a correction is due.

What I like about this indicator is that it can give you overbought and oversold readings, similar to the RSI, but the mathematics behind it are completely different from the RSI. Therefore, if the RSI were to confirm this new indicator, that would be a more powerful signal than say the RSI confirming a Stochastics signal.

By the way, if you scroll down, you will find a box to enter in your email address. By doing so, you can receive an email notification whenever there is a new post to this site. Since I do not post on a regular basis, this can save time by avoiding continually checking in to see if there is any new material. Thanks for visiting.

Is Gold Increasing in Value?

This week, the price of gold was up by just under $20.00 an ounce, and gold stocks, as measured by GDX increased by 3.42%. My gold stocks short position gave back all the profits made last week, but I will continue to hold these positions, as long as they do not exceed their October 15th high.

With gold rising so quickly, you may think that it would be insane to short gold stocks, but then again, is gold really rising? I feel that much of the yellow metal's recent rise can be attributed to a falling dollar and not to rising gold. In other words, an ounce of gold is worth more dollars, but those dollars are, in turn, decreasing in value by a similar rate.

This is evidenced when looking at the value of gold in a currency that is not currently being debased, such as the Canadian Dollar. The chart on the bottom shows that Canadians holding physical precious metals, such as myself, have not made money in the last 2 months.


Although holders of gold have not seen impressive profits when denominated in currencies other than the US Dollar in last couple months, this has not been the norm since the gold bull market began. The trend for gold is up overall in all currencies when looking at the long term picture, as illustrated in the following chart.


As you can see, Gold has done quite well when denominated in several major world currencies over the long run. This is shows that the bull market in gold is healthy and that gold in real terms certainly is rising.

Furthermore, in addition to trading gold stocks, I feel that one should allocate some money in a core position of physical gold or silver, and to hold that position regardless of what the charts tell you. In a bull market, the best strategy is a buy and hold strategy.

The Yen, the Australian Dollar, and Stocks

As you probably know, stock markets world wide experienced significant corrections yesterday. Many people blame this on the 20th anniversary of the 1987 stock market crash, but I think that it was quite clear that a correction was coming, no matter what the reason behind it.

In the last post, I said that gold stocks were looking weak, and right now I still feel that they are looking weak. Some of this weakness has to do with the fact that equities in general are declining, and gold stocks, being stocks, will continue to fall as the markets fall, as Paul mentioned in a comment in the previous post.

When times get tough, it is certainly better to be in the metal rather than in gold stocks. You know, gold actually rose about 11 dollars this week, and paradoxically, my short gold stocks position made over 5% this week.

Anyway, let's have a look at some of the intermarket forces at work that may be driving global stock market weakness.

The following chart shows the Japanese Yen divided by the Australian Dollar. This relationship helps illustrate the health of what is called the carry trade. This refers to when traders borrow Yen at low interest rates, and convert it into a higher yielding currency in order to make profits.

Some traders go a step further and invest the higher yielding currency into the stock market for additional profit potential. An example of this would be a trader borrowing Yen at a rate of interest of 0.5% and buying Australian Dollars, which yields 6.5%, for an easy 6% profit. The trader then may invest the money in Australian stocks.

Since the trader borrowed Yen he will have to pay it back. If the Yen remains flat or decreases, the trader will hold his position. However. if the Yen starts appreciating rapidly, the trader will be inclined to sell his Australian stocks, take his dollars, and convert them back into Yen, before it appreciates anymore.


The above chart shows the TSX in red, which is similar to the Australian Stock market, and as you can see, when the Yen increases relative to the Aussie, the carry trade unwinds, and the TSX plummets. What happens in the TSX is also experienced by other markets world wide.

This fact, that the yen increased sharply this week, is one of the main culprits to the recent stock market decline, in my opinion anyway.

Gold Stocks Do Not Look Healthy Right Now

Last week there were two posts made suggesting that the Euro had topped and the US Dollar had bottomed. I still feel this way right now. As a consequence to this, gold stocks may have topped yesterday.

Ever since I turned bearish last week, gold stocks have continued to rise, but they have done so in a fashion not normally associated with a healthy bull market. The daily chart of the GDX, for example, does look worrisome to me. Please refer to the following annotations by clicking on the chart:


In addition, silver is looking weak right now. The following chart is a daily candle chart of SLV, the silver ETF:


Finally, the Australian Dollar, which is a currency very closely linked to the price of gold, looks overextended and ripe for profit taking now. I'll let this daily chart of the currency do the talking however:


So there you have it, three charts, showing three perspectives. I hope that makes sense. If you have any questions or disagreements, please write a comment below. Thanks for stopping by.