Gold Miners -Oversold (graphs attached)
Posted: Fri Jul 15, 2022 9:33 pm
Gold Miners – Oversold ?!
Emailed this evening
By Paul Wong | Sprott Market Strategist
From a market price action perspective, the last few weeks have been extraordinary.
From the June 8 high, BCOM (BBG Commodity Index) fell by -20% in less than 4 weeks, the sharpest 4-week drop since the GFC (credit system near-collapse) and March 2020 (oil went negative). For an equity reference, XME (Metals & Mining) fell by -40%, and XOP (O&G Expl & Prod) fell by -37% from June 8. In the past 4 weeks, there was no comparable economic or market calamity to explain this collapse from a fundamental point of view.
This price action was an example of all the challenging market conditions: enormous relative size of passive and quants vs active funds, the dominance of CTAs in trading flows, and dealer hedging flow, all amplified by algo technical buying/selling into one of the worst market depth conditions ever. It is hard to believe it could happen until you see it happen. This selling wave was a near-perfect storm of central bank policy, technical factors, flow dynamics, and poor trading liquidity. The latest leg of USD strength, driven by relative yield spreads and currency volatility, helped grease the slide.
Thematic positioning of inflation and rates re-pricing higher has branched out to recession as exemplified by EDZ2EDZ3 (Eurodollar futures spread) which is now pricing in three rate cuts sometime in 2023 (recession). The final catalyst was the terrible May CPI report, and copper is now tracking EDZ2EDZ3’s recession call. With breakeven yields also rolling over hard, the market has priced in a recession, accelerating fund outflows and market depth falling even further.
The CPI print on June 10 marked the beginning of 75 bps rate hikes and a sharp increase (or the final straw) in recession expectations. What followed was an intense mass liquidation event that I had not seen since 2008 and March 2020. These were some of the largest waves of selling (CTAs and others) into one of the poorest market depth conditions ever with eye-popping consequences. If anyone ever needs an example of selling into a vacuum, this would be a good one.
cid:image009.jpg@01D8976B.B7745920
Source: Bloomberg ( 11 Jan 2022 )
For gold, it was like being caught in an event horizon of a black hole. With near the entire market in outflow mode (equities, bonds, commodities, and even long volatility products), gold as a safe-haven asset did not matter in those few weeks. We had seen similar trading actions in 2008 and 2020 when liquidity conditions forced the selling of all assets. While the song may be different (cause of liquidity destruction), the dance is the same (sell everything). In other words, we are in the everything bear market (bad news), but the good news is that it usually does not last too long (the world tends to end). What is needed is for some liquidity to return so there can be a rotation to defensive or safe-haven (rotation vs puking). The Eurodollar futures spread is already pricing this liquidity return but at an unknown date in 2023. The EDZ market is $ trillions in size; it matters.
ST for gold, it is challenging to call except to say it is incredibly oversold. Below is a chart with my best guess, given what I see developing. The uptrend from 2018 is now busted. If the LT pattern is bullish, I still believe it is, there should be a consolidation A-B-C pattern. The issue for me is that C-leg looks too short in time; there should be some symmetry with the A-leg. The lower red dashed line is ~$1675 and sits nicely between the 50/38 Fibonacci lines. I will skip the other technical indicators as they are all very oversold.
cid:image010.jpg@01D8976B.B7745920
Source: Bloomberg ( 11 Jan 2022 )
Gold equities are even more oversold. Below is a chart of GDX as a reference. There is a major support level at ~$25.75 and an opening gap at $26.25, which GDX filled last week and moved higher. GDX is also at the bottom extension of the blue down-channel.
cid:image011.jpg@01D8976B.B7745920
Source: Bloomberg ( 11 Jan 2022 )
Here are some Sentiment Indicators that have proven helpful in the past, but I underscore again to the state of illiquidity. They are at hold your nose and buy readings that can work as long as instant gratification is not a criterion.
cid:image012.jpg@01D8976B.B7745920
Source: Paul Wong ( 11 Jan 2022 )
This graph below is one of my favorite types of indicator; the positioning wipe-out. The old trader adage that lows are made when the last seller has been exhausted (and not when it is cheap) is very close to happening.
cid:image013.png@01D8976B.B7745920
Source: Paul Wong ( 11 Jan 2022 )
I see the same dynamics building now as in prior cycles before a significant move higher for gold bullion, but the timing is far more complicated. As much as CTAs and the types have pounded gold and other resources/commodities lower, they can just as quickly flip and push everything higher under the right conditions.
Emailed this evening
By Paul Wong | Sprott Market Strategist
From a market price action perspective, the last few weeks have been extraordinary.
From the June 8 high, BCOM (BBG Commodity Index) fell by -20% in less than 4 weeks, the sharpest 4-week drop since the GFC (credit system near-collapse) and March 2020 (oil went negative). For an equity reference, XME (Metals & Mining) fell by -40%, and XOP (O&G Expl & Prod) fell by -37% from June 8. In the past 4 weeks, there was no comparable economic or market calamity to explain this collapse from a fundamental point of view.
This price action was an example of all the challenging market conditions: enormous relative size of passive and quants vs active funds, the dominance of CTAs in trading flows, and dealer hedging flow, all amplified by algo technical buying/selling into one of the worst market depth conditions ever. It is hard to believe it could happen until you see it happen. This selling wave was a near-perfect storm of central bank policy, technical factors, flow dynamics, and poor trading liquidity. The latest leg of USD strength, driven by relative yield spreads and currency volatility, helped grease the slide.
Thematic positioning of inflation and rates re-pricing higher has branched out to recession as exemplified by EDZ2EDZ3 (Eurodollar futures spread) which is now pricing in three rate cuts sometime in 2023 (recession). The final catalyst was the terrible May CPI report, and copper is now tracking EDZ2EDZ3’s recession call. With breakeven yields also rolling over hard, the market has priced in a recession, accelerating fund outflows and market depth falling even further.
The CPI print on June 10 marked the beginning of 75 bps rate hikes and a sharp increase (or the final straw) in recession expectations. What followed was an intense mass liquidation event that I had not seen since 2008 and March 2020. These were some of the largest waves of selling (CTAs and others) into one of the poorest market depth conditions ever with eye-popping consequences. If anyone ever needs an example of selling into a vacuum, this would be a good one.
cid:image009.jpg@01D8976B.B7745920
Source: Bloomberg ( 11 Jan 2022 )
For gold, it was like being caught in an event horizon of a black hole. With near the entire market in outflow mode (equities, bonds, commodities, and even long volatility products), gold as a safe-haven asset did not matter in those few weeks. We had seen similar trading actions in 2008 and 2020 when liquidity conditions forced the selling of all assets. While the song may be different (cause of liquidity destruction), the dance is the same (sell everything). In other words, we are in the everything bear market (bad news), but the good news is that it usually does not last too long (the world tends to end). What is needed is for some liquidity to return so there can be a rotation to defensive or safe-haven (rotation vs puking). The Eurodollar futures spread is already pricing this liquidity return but at an unknown date in 2023. The EDZ market is $ trillions in size; it matters.
ST for gold, it is challenging to call except to say it is incredibly oversold. Below is a chart with my best guess, given what I see developing. The uptrend from 2018 is now busted. If the LT pattern is bullish, I still believe it is, there should be a consolidation A-B-C pattern. The issue for me is that C-leg looks too short in time; there should be some symmetry with the A-leg. The lower red dashed line is ~$1675 and sits nicely between the 50/38 Fibonacci lines. I will skip the other technical indicators as they are all very oversold.
cid:image010.jpg@01D8976B.B7745920
Source: Bloomberg ( 11 Jan 2022 )
Gold equities are even more oversold. Below is a chart of GDX as a reference. There is a major support level at ~$25.75 and an opening gap at $26.25, which GDX filled last week and moved higher. GDX is also at the bottom extension of the blue down-channel.
cid:image011.jpg@01D8976B.B7745920
Source: Bloomberg ( 11 Jan 2022 )
Here are some Sentiment Indicators that have proven helpful in the past, but I underscore again to the state of illiquidity. They are at hold your nose and buy readings that can work as long as instant gratification is not a criterion.
cid:image012.jpg@01D8976B.B7745920
Source: Paul Wong ( 11 Jan 2022 )
This graph below is one of my favorite types of indicator; the positioning wipe-out. The old trader adage that lows are made when the last seller has been exhausted (and not when it is cheap) is very close to happening.
cid:image013.png@01D8976B.B7745920
Source: Paul Wong ( 11 Jan 2022 )
I see the same dynamics building now as in prior cycles before a significant move higher for gold bullion, but the timing is far more complicated. As much as CTAs and the types have pounded gold and other resources/commodities lower, they can just as quickly flip and push everything higher under the right conditions.