NFTRH Interim Update 1.16.13

A subscriber was confused about the post entitled The CCI-Gold Ratio Will Tell the Story as it sounds contradictory to the big picture analysis in NFTRH.  In the event others found it confusing, let me explain further…

The post was actually inspired by another subscriber who made note of Don Coxe’s current view that gold and gold stocks should be reduced in light of massive global money printing that is going on and is likely to continue to go on.  His view as best I understand it is of re-liquified banks and global economic revival as new money gets out there.

He projects the money base to rise just as we have been looking for and that would be positive for gold and thus, the miners. As for the miners, I believe they would be fine or even outstanding performers for the early part of an inflationary cycle if indeed that is what is on tap.

Remember, the post was theorizing on ‘what if’ Coxe’s theory is right and widespread economic revival takes hold in a semi-enduring way.  I by no means think that is a done deal.  I only think big inflation attempts are a done deal.  This is important.  Also important is that the fuel for any economic revival is paper… burning paper.  I believe that some assets and markets will rise, but real economic revival, especially in the US and Europe?  I am not on that bandwagon.

But the gold miners’ fundamentals by the Gold-CCI measure may have gotten ‘as good as it gets’ for a while if an interim economic pop is coming.  In the big picture we are in economic contraction.  That is what the long-term chart of the Gold-CCI ratio (a measure of gold’s real price, second chart below) says.

The gold miners are a ‘buy’ when their fundamentals are improving (during economic contractions) but their stock prices are declining (as at the ‘W’ bottom that came after the technical breakdown in early 2012), and a ‘sell’ when their fundamentals are degrading (during inflationary phases – as we saw in the run up to 2008) but their stock prices are rising.

hui and rpg
In 2010 HUI made a good rise while Au-CCI took an intermediate correction (blue shaded area). In 2012, HUI declined while Au-CCI hit new high.

The chart above shows that HUI made one of its best post-crash moves in 2010 as the real price of gold took an interim (that is important, we are talking about interim corrections to the big, secular trend of a rising ‘real’ price and economic contraction) hit, not unlike the one we are theorizing about now.

The real price of gold took a leap out of the Euro crisis and now Au-CCI is consolidating.  As counter intuitive as it sounds, a consolidating or correcting ‘real’ price of gold is often a good thing for the gold mining sector’s stock price prospects.  That is when the ‘inflation bulls’ come aboard and drive commodities of all kinds higher.

Gold-CCI Ratio AKA a measure of the ‘Real’ Price of Gold

The post yesterday simply showed a resistance area to the CCI-Gold ratio (corresponding with the support area shown on Gold-CCI above) that could contain any coming economic relief before a secular economic contraction bites once again.

That is because inflationary revivals never last.  They cannot last because they are dependent on things other than sustainable economic principles.

Personally, I have learned a lesson over the years and that lesson is that gold is gold and gold miners are companies (some good, many bad) that dig the stuff out of the ground, often under difficult political not to mention geographical and geological conditions.  The last time the real price of gold was under pressure for an extended period was the mid 2000’s and people touted gold stocks right along with base metals and energy stocks.

The point is that there is a difference.  A deflationary backdrop that forces economic contraction and compels the inflators to inflate is good for the gold stock sector, fundamentally.  But if – and to me it is still an ‘if’ – this is an ‘inflation up’ cycle of whatever duration, the Au-CCI ratio is likely to decline, degrading gold miner fundamentals on an interim basis.

The point is that if profits are to be had, they should be taken on an intermediate trade within the scenario noted by Don Coxe.  Gold is fine.  Gold miners are a play and they should be sold when/if the inflation touts are promoting them along with copper, oil, grains, hogs, etc.

We are all learning all the time and one thing I have learned is that the very clear cycles in the gold stocks should be traded, not held.  The sector is more confusing than most because its fundamentals are out of alignment with stock performance.  This is due to the “misperceptions game” that I often write about. As the fundamentals degrade, the inflation bulls buy more.  As the fundamentals improve, the inflation bulls sell more.

In the past I had more patience in riding out the “misperceptions game”.  But with an unstable global geopolitical backdrop and the hazards of debt and leverage everywhere in the developed world, that now seems like a quaint old notion.  This is why I have written that I plan to tighten up my game going forward.  When the turns come, market reactions are more dynamic now than they used to be.

For now, the Coxe view does nothing to change our current view.  In fact, it reinforces it from the view of an “inflation up” cycle.  There was another post promoting EWI’s viewpoints, which I have got to go read now.  We do not want to ever forget the biggest picture view, which is economic contraction with a deflationary backbone.

If the massive inflation attempt fails to result in further rebounds in commodities and economies, the precious metals may benefit on a relative basis by their decoupling from the bad sentiment structure of the broad market; if policy makers continue to fight the good fight against deflation.  But this would need to be managed on a tight time frame, if applicable.

If this update has failed to clarify anything, please do not hesitate to contact me.  I realize it is somewhat of a ramble.

Leave a Reply

Your email address will not be published.