Gold revival looking shaky
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. rodmyr@gmail.com.
The trend is your friend
Frequently Asked Questions about this Article…
Newcrest Mining has had a tough few months: the company announced early-June write-downs of between $5 billion and $6 billion, then added another $200 million late last week bringing the total to $6.2 billion. Most of that negative news has driven a noticeable dip in the Newcrest share price.
Most of the trouble was in Newcrest's West African and Papua New Guinea operations, while Australia's Telfer mine alone accounted for more than $1 billion of the write-downs.
The relationship has changed over time. Until August 2011 there was little obvious correlation, but after that both the gold price and Newcrest moved down together. Since late 2011 Newcrest has appeared to follow gold trends, with both recording lower highs and lower lows on the weekly charts — the classic sign of a downtrend.
Weekly charts show a strong downtrend for both gold and Newcrest, meaning downward momentum has prevailed. The daily chart was more optimistic in late June, showing higher highs and higher lows (a short-term uptrend), but that uptrend has looked shaky recently.
The article doesn't give investment advice, but it suggests caution. Short-term strength seen on daily charts may be weakening on weekly charts, so investors should watch technical signals closely and avoid assuming the short-term bounce will become a sustained recovery.
A weekly break below the dotted green up‑trend line indicates the short-term uptrend is losing strength. That can be an early warning sign that the stronger downtrend may reassert itself for both the gold price and Newcrest share price.
After the most recent $200 million write-down announcement (bringing the total to $6.2 billion), Newcrest's share price fell a further 0.5%.
The article recommends keeping an eye on the weakening up‑trend line as an early warning sign and placing stop‑losses to protect any new entry positions, whether you are taking a long or a short position.
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