A Melman Minute
| By | Leonard Melman |
|---|
As noted in Wednesday's "Melman Minute", we have a new technical indication that all may not be well within the precious metals markets - even though the past two days have somewhat reversed that technical indicator. We are referring to the relative comparative performance between gold itself and the mining share indexes.
Historically, when the shares outperform the precious metals, that is a positive indication since most metals investors realize that the shares have more leverage than the metals and so a relative move into the shares versus the metals normally is a bullish indication of growing optimism - and vice versa. With that in mind, please note the comparative performance of gold itself and one of the most widely watched mining share indexes, the XAU.
As might be observed, gold bottomed during early November just above the $1,130 level and since then has moved irregularly higher, now trading close to $1,200. Presumably, in a neutral market, XAU and the other mining share indexes should not have approached their values near that bottom, but should have moved progressively higher - but that has not been the case.
Please note that XAU actually fell just a few days ago to almost exactly the same level as early November - despite the fact that gold itself was trading $60 - $70 higher. While the index has moved sharply higher in the past few days, presumably buoyed up by the collective actions of 'bargain hunters', I still believe this relative weakness in the shares can be interpreted as a possible warning of coming poor performance in the metals.
By the way, as a side note the XAU index chart is presenting us with an interesting - and possibly contradictory - set of possible chart patterns. On one hand, the pattern could easily be a bearish down sloping right angle triangle with a series of declining tops and a horizontal bottom near 63 while on the other hand, the two bottoms near that level could be the beginning of a bullish 'double bottom' formation. It will be most interesting indeed to see which pattern provides us with an accurate signal.
In my mind, that is the most powerful argument for technical analysis as our decisions can be based on what the markets are actually doing, rather than was commentators are saying. As the old saying notes, "actions speak louder than words."
……..
One cannot help but feel a little sorry for one of the major mining giants, Barrick Gold. First they encountered significant governmental environmental and regulatory problems regarding their Pascua-Lama Project along the border between Chile and Argentina which led to the suspension of that important property and just recently, their website carries a note that:
"…the company will initiate procedures to suspend operations at the Lumwana copper mine in Zambia following the passage of legislation that raises the royalty rate on the country's open pit mining operations from six percent to 20 percent…The new taxation regime, which is expected to go into effect on January 1, 2015, eliminates corporate income tax, but imposes a 20 percent gross royalty on revenue without any consideration of profitability."
They did note the hope that the government of Zambia would reverse that decision.
I believe this development continues to illustrate the litany of problems which can occur in what might loosely be termed "Third World" nations which do not have a long history of reliable and dependable corporate law and support for free enterprise.
(PLEASE NOTE: The Melman Report offers no investment advise at all regarding the merits of Barrick Gold. This information is presented for information purposes only.)
The past two days have been quite remarkable within major 'conventional' securities markets as important major averages, particularly within important United States securities markets, soared in a spectacular manner with the Dow Industrials (see short-term chart) roaring ahead by over 700 points, including a gain of more than 400 yesterday.
Canada's TSX Index also showed dramatic gains during those two days, rising from a Wednesday opening of near $13, 840 to over 14,300 by yesterday's close. Most observers attribute the sharp gains to statements by the American Federal Reserve that they had no plans to raise interest rates for the foreseeable future - and apparently a raise in rates has been one of the markets' great concerns.
The great question is what to expect going forward and that question remains more than slightly in doubt - which is why we continue to advise both substantial caution and unusually high 'due diligence' before making trading or investing decisions in the current environment.
……….
One of our readers sent me an analysis by an eastern Canadian writer whose main point was that purchases of mining shares were in order because they were "on sale", an argument we have heard with great frequency for some time. Unfortunately, there is a great question involved and that is to determine exactly when a "sale price" is achieved. If we turn to the chart of above-referenced Barrick Gold, an interest series of questions might be posed.
Was Barrick "on sale" when it fell from $55 to $45? Was an attractive "sale price" reached when it fell to $40, or $35, or $30 or $25 or $20 or $15 or even $12? These questions simply illustrate the difficulty of establishing a true price when an investment might be considered to be a genuine bargain - and it might be noticed that the same question is relevant for the world of petroleum where Crude Oil has fallen successively to $100, $90, $80, $70, $60 and now $55.
My underlying point is that once a downward trend has been established, it is exceedingly difficult to point to one particular price and declare that the investment is now in a favourable situation.
"Caveat Emptor" or "let the buyer beware" remains a valuable adage to note in any market.
EARLY FRIDAY DATA as of 7:40 AM PDT
Dow Industrials, 17,797, + 19
TSX Index, 14,408, + 61
Gold, $1,198, + $3
Silver, $15.89, unchanged
Base metals, (average), unchanged
Mining share indexes (avg.), + 0.8%
US Dollar Index, 89.62, + 14 basis points
TYX Index (30-year bond rates), 2.811 - 01 basis point
Crude Oil, $55.82, + $1.46