What Is It About These Divergences That Bothers Me?

Although I've kept my PM trading positions intact, there are several divergences that worry me. First is the divergence between Amex Gold BUGS Index (HUI) and gold where the stocks failed to make a new high while gold did. Some of that may be attributed to weaknesses in South African golds that were affected by the power outage, however, price/MACD divergence is also apparent in AEM, one of the strongest stocks.

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Today's Fed action is all the more crucial in this light.

Comments

[ITSEARL:]

Could it be that $ that would go to gold stocks are being diverted to the financials trying to pick a bottom & also buying the metal due to the large short position that may need covering soon? A bigger bang with the hard stuff than paper. Then, since the situation is much worse in silver a few are shifting to silver instead?? The gold /silver ratio should continue to shrink. Read Ted Butlers thinking!

2008 Jan 31 05:31 PM

[ITSEARL:]

Could it be that the aggressive are diverting $ to bottom pick financials and buying the metal if the large short gold positions need to cover? Since the silver shorts are in even worse shape and much larger, some gold $ might be going silver. According to Ted Butler the gold/silver ratio will shrink as more hear the silver story.

2008 Jan 31 05:45 PM

[sammyg123:]

I agree with all of the above. Also, gold stocks are dollar denominated paper assets with management, margin, and macroeconomic risk which is being priced in. Gold, however, is a dollar denominated HARD ASSET which is in demand and reacts faster and faster to price action in the currency and oil markets. I believe that gold stocks will catch up, but will have trouble due to the crisis in financial markets. For example, if I was a large bank or investment house with much assets in gold stocks and huge losses from subprime, I would be selling my stocks to shore up my balance sheet against losses in the subprime market. The bottom line is it makes sense to accumulate gold for the short and intermediate terms as per your personal strategy, but also to accumulate the gold stocks. Right now, the product that they produce is rising in price faster than their margin pressures. This could change, for if their margin pressures increase too fast, you will see mines closing and reducing production until the price of bullion is more supportive of their operation. The argument for bullion in the short term is stronger and stronger in this light, especially due to inflation of oil costs (oil is necessary for gold miners!) and also due to upward wage pressure. These things will balance out over time, which is what a gold stock trader must keep in his mind at this time.

2008 Jan 31 11:55 PM