It's been a tough few months for Australia's biggest goldminer, Newcrest Mining. Not only has the gold price been on the skids in recent months, but the company itself has been releasing bad news to the markets.
Back in early June Newcrest said it would write down its asset base by between $5 billion and $6 billion. Then late last week it added fuel to the fire, announcing another $200 million in write-downs that push the total to $6.2 billion.
Most of the trouble occurred in its West African and Papua New Guinea mines, but Australia's Telfer mine accounted for more than $1 billion in negative news, too.
The result has been a big dip in the Newcrest share price.
But the interesting question for investors is whether that weakness is the result of Newcrest-specific issues or the general gold-price malaise.
If you take a look at the attached chart - produced by Robert Brain, a member of the Australian Technical Analysts Association - comparing the weekly gold price with the weekly Newcrest share price, a couple of interesting facts emerge. The chart shows the Newcrest share price in dollars on the right-hand axis and the gold price in $US per ounce on the left-hand axis.
Until August 2011 the two prices seemed to be moving without any noticeable correlation. Then the gold price ran up to match Newcrest's trading level by August. Following that both turned downwards, with Newcrest seemingly taking its lead from gold from late 2011, with each recording a series of lower highs and lower lows; the classic definition of a down trend.
Once a down trend is in place the fundamentals often become almost irrelevant. This is because for a time the downward momentum is likely to hold sway and further falls are statistically more likely than a change in direction. But things get interesting when we look at the daily chart, which is more sensitive to short-term change than the weekly chart. The daily chart shows that both Newcrest and gold seemed to turn the corner in late June as the gold price bounced off its lows. Both began to experience higher highs and higher lows, the hallmark of an up trend. The question is whether the short-term up trend will continue and make itself felt on the weekly chart, which is reflecting some nascent optimism also; or whether the strong down trend on the weekly chart will reassert itself.
Things are already looking a little shaky with both prices falling through the dotted green up-trend line on the weekly chart. That indicates the up trend is weakening and, after the most recent write-down announcement, Newcrest's share price fell a further 0.5 per cent. So, if you are wanting to take a position (short or long) in either or both markets in coming days, keep a weather eye on the weakening up-trend line as that will be the early warning sign of the direction the markets will take. And put stop-losses in place to protect your entry position.
This column is not investment advice. firstname.lastname@example.org.
The trend is your friend