Here�s a
question many investors have asked in recent weeks, especially given the
current divergence between the gold and copper prices.�
Copper has a
history of providing leading signals for the price of gold.� Most notably, the copper price
double-bottomed between 1999-2001 and refused to
make a lower low during a time when the price of gold made a 20-year
low.� This leading signal in copper
preceded the major turnaround in the yellow metal price in 2002 and beyond.
For years I�ve
relied on the proxy of Freeport Copper & Gold (FCX) as a
leading/confirming indicator for the XAU gold/silver mining index.� It�s true that the copper producers have
historically led the gold mining stocks at pivotal turning points in short-,
intermediate- and even long-term time frames.�
This appears to be one area of mining sector research in need of
greater attention.
With this
question of copper vs. gold leadership in mind, let�s take a look back in
recent history in search of a potential connection between the two.� We�ll start by looking at a major blue chip
copper stock, Southern Copper Corp.
Southern Copper
Corporation produces copper, molybdenum, zinc, and silver.� The company, formerly known as Southern
Peru Copper Corporation, was founded in 1952 and is based in Phoenix, Arizona.� Southern Copper is a subsidiary of Americas
Mining Corporation.� The stock, which
trades under the symbol PCU on the NYSE, has long been a leading indicator of
the XAU gold/silver index as a comparative analysis of both charts will show.
In late 1999
when the Kress 30-year cycle for equities peaked, the gold stock group as
represented by the XAU also suffered from the broad market selling
pressure.� The XAU made an interim peak
in October 1999 along with PCU.� The
XAU was the first to peak out and from there the XAU entered a downward
trend, making a series of lower highs and lowers lows throughout the year
2000.� The XAU finally hit bottom in
October 2000 � exactly one year after its peak.�
During
1999-2000, PCU made a higher low against the XAU index.� While the XAU broke below its 1999 low, PCU
stayed above its low from �99 and made a conspicuously positive divergence
against the XAU.� This was the first
intermediate-term technical signal that the gold stocks were due a reversal
and it turned out to be prescient.� The
XAU embarked on an 18-month rally off its October 2000 low at the 43 level to
its high just below 90 in
May 2002.
By the time the
XAU made its multi-year high at the 90 level in May 2002, PCU failed to make
a higher high.� This was an
intermediate-term negative divergence and it predicted a period of weakness
ahead for the gold stocks.� Not
surprisingly, the XAU entered a period of underperformance relative to the
broad market as it pulled back from its May �02 high and entered a 14-month
trading range between the 60 and 80 levels.�
The XAU finally
broke out above 80 in
July 2003, but not before another leading signal from PCU.� PCU broke out to a higher high in January
2003 at the same time the XAU was making a lower high below its May 2002
peak.� The breakout made by PCU in
January 2003 was the signal that the major trend for the mining sector was
up, notwithstanding the interim weakness in the XAU index.� Within five months of this leading signal
from PCU, the XAU broke out of its interim trading range and was on its way
to higher levels in 2003.
After a
vigorous rally in the second half of 2003, the XAU made a double top between
December 2003 and January 2004.� This
led into a long period of underperformance versus the S&P as the XAU
experienced a rather large trading range in 2004 which stretched from the 80
level to the 110 level.� The XAU closed
with a loss for 2004, yet PCU made a higher high in October 2004 which signaled that a period of strength was just ahead for the
gold stocks.
After
overcoming a shaky start to the New Year in 2005, the XAU recovered to make a
higher high in 2005.� True to form, PCU
had led the way higher for the gold stock group once again.
In May 2006 the
XAU encountered resistance and there followed another period of
underperformance as the XAU spent the better part of the period between May
and December �06 in a narrow trading range between the 120 and 150
levels.� While the XAU closed the year
2006 below its high from May of that year, how did PCU fare?� The stock managed to close 2006 on a high
note after making a series of higher highs and higher lows throughout that
year.� This was yet another leading
indicator that the XAU would eventually succeed in breaking out of its
interim trading range and travel to higher levels.
The anticipated
breakout in the XAU didn�t occur until July 2007.� It was followed by a whipsaw-type pullback
in August �07.� At the August 2007 low
the call/put open interest ratio for the CBOE Gold Index reached an
extraordinary level which strongly suggested that insiders were heavily long
the gold stocks.� This proved to be an
accurate indicator as the XAU roared ahead from the August low into November
of that year to a new all-time high, covering a ground of nearly 75 points
from bottom to top.� After a brief but
shallow correction in November-December, the XAU recovered its old high and
made a slightly higher on Jan. 11, 2008.
Up until the
November 2007 high in the XAU, the PCU price line was confirming the bull
market in the gold stocks.� Since
November �07, however, PCU has pulled back and retraced some of its previous
gains and is now at its lowest close (as of January 11, 2008) since August
2007.� PCU has been lagging the XAU for
the past two-and-a-half months.� Is this a concern for the gold stocks?
The lag between
the upside breakout to new highs in PCU in November 2006 and the XAU�s eventual breakout in the summer of 2007 was
obviously a lot longer than the historical norm.� It�s possible that the gold stocks will
overcompensate for this long lag by continuing to surge upward in the weeks
ahead even if PCU and the other leading copper stocks continue to underperform.� At
some point, though, a continued lag between copper and gold, and the copper
and gold mining stocks, will reach the break point and the yellow metal,
along with the PM stocks, will give way to the negative undercurrent.
Much of the
current strength reflected in gold and the leading gold stocks is due to the
fear premium as investors run for cover from the widespread fears over the economy.� Gold has greatly benefited from its safe
haven status during this time of investor uncertainty.� When the fear has finally lifted, however,
the fear premium will no longer be in the yellow metal�s favor.� The �heads up� signal in such equities as PCU,
FCX, IMN:TSX and TCK seem to be warning of this
intermediate-term eventuality.
Clif Droke
Editor, The Daily Durban Deep/XAU Report
Clifdroke.com
Clif Droke
is the editor of the three times weekly Momentum Strategies Report
newsletter, published since 1997, which covers U.S. equity markets and
various stock sectors, natural resources, money supply and bank credit
trends, the dollar and the U.S. economy.�
The forecasts are made using a unique proprietary blend of analytical
methods involving internal momentum and moving average systems, as well as
securities lending trends.� He is also
the author of numerous books,
including "How to Read Chart Patterns for Greater Profits."� For more information visit www.clifdroke.com
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