Notes From the Rabbit Hole

It Must be a Gold Bull Market, Because…

It must be a gold bull market because…

It goes on and on… all of them have ardent followings.  What to make of that?

The above are just observations, not reasons to think gold is in a bull market.  But with the hyper kinetic environment currently in play I am reminded of the 2001-2011 period and how annoying it was to observe the sector during a bull market (unlike the bear, which was relatively easy; just avoid it).

It was annoying to read the reasons that Goldman Sachs’ Technical Analysis team gave for a major correction when gold was at 800 (uh, it went up) and it was annoying to read the gold promoters’ reasons why you had to own gold in the face of the oncoming Armageddon (I agree that gold is a sensible portfolio holding, but I don’t agree with the trade in fear that so often goes with it).  Gold is simply value and insurance, as I noted in this and many other articles back then.

Moonshine or Strychnine (Dec. 4, 2005)

“Sadly for paper bulls, this long term chart implies a bottom at around 1.00+-, which could mean the S&P and gold will both have a price of 1500, or 500 (these are just random numbers and actual values will depend on inflation, deflation or “muddle through”). But the implications of this chart as well as current macroeconomic fundamentals ( US’ massive deficits, gold rising in global currencies, etc.) are that paper assets and gold will continue to head toward parity, in price. So, while many people celebrate gold’s rise and obsess on the stock market’s price action, I would advocate getting clean and sober, ditching the still and taking a cold hard look at this.

Gold is not a speculative asset at its core. It remains the same, sitting there like a lump on a log. Timeless, it doesn’t care what is happening around it. It is liable for no debts and it pays no interest. It is all the other stuff that is in motion. The moonshine is effective at blurring an investor’s vision to all of this.”

Well, the SPX-Gold ratio did indeed bottom “at around 1.00+/-“ about a decade later.  But more importantly, gold never changed, not for one moment during the rest of the bull cycle or ensuing years of out performance by the stock market.  During the bull rush years it was value and insurance and it was exactly that during the bear phase.

So if you agree with me on these simple points (not to say you do, but… ) do you also agree with me that getting caught up in the hype and mania of the new gold bull turned ‘inflation trade’ (ref. our tracking of what may be a maturing ‘inflation’ play on Fed policy confusion here, here, here and here) is probably getting a little too much headline space and a little too much momentum?  Now, I make mistakes all the time, but one mistake I will not make is to confuse momentum for something sound that I can make rational plans by.

This article is actually inspired by emails received from two NFTRH subscribers, one in essence challenging my bullishness on gold and the gold sector and bearishness on the US dollar, and the other in essence challenging my bullishness on US stocks (especially the Semiconductor sector) and my calling precious metals a blow off situation (I am calling commodities a short-term blow off situation, but the precious metals could get caught up in it due to their positive correlation as part of the ‘all one market’ lately, as Bob Hoye would say).

The reason I highlight these views (with their permission) is because that is gold, inspiring spirited (to say the least) debate on both sides of the equation.  But the debate can keep us from understanding the simple concept of long-term value (as noted before, my gold position is nearly 1.5 decades old).  The rest is all momentum and noise.

From Subscriber ‘M‘…

Hi Gary,

Nice report, a few remarks.

What you see as a dollar bear trend is a BULL FLAG. Everything you describe in your report is dependent on the direction of the dollar. I would not want to bet against it, not here, not within the next year or more.

Until every gold bug is destroyed, we will have rallies like we had on Friday. This is not 2001. Rates were much higher and leverage was much, much less. I understand analogues can be useful if, ceteris paribus, the backdrop is the same…it is not. So 2001, just like the 1970’s analogues, are worthless.

There is no INFLATION anywhere. Hence, no inflation trade. WE have been in a epic deflation dating back to 2000 or more. Talk of such is ridiculous. Your own favorite metric, TLT, shows such [my metric is actually the long bond’s yield, AKA the Continuum].

I do ‘M’ a disservice by greatly abbreviating his input, but you get the picture.  Everything has been dependent on the direction of the dollar and that has been exactly my point in calling this an “inflation trade” (only a bounce thus far) and it is exactly the reason I have tuned out the gold bug community and its relentless pumping; commodities, precious metals, stocks… all part of the anti-USD ‘inflation trade’ thus far.  My response…

Very interesting ‘M’.

One point, my favorite indicator is not TLT, it is the 30 year yield… the long-term continuum. As noted last week (I think), that is the LIMITER (100 month EMA) to a prospective inflation trade until proven otherwise and it has not proven otherwise for decades upon decades.

So I really think you and I are not so far apart. I realize you are big picture person and I am too. But I have got to manage smaller pictures as well and what I am seeing implies that the smaller picture (measured in months to maybe a year) is not deflationary. We blew deflation off in December IMO.

Inflation has not been the dominant or [natural] force. Deflation has been. That’s why I’m calling it [inflation] a ‘trade’.

For reference, we had a post the other day talking about the ‘Continuum’ as the limiter to any extended ‘inflation trade’ that may whip up.  Here is the chart from that post.

From Subscriber ‘L‘…

Hi Gary, I had to take exception to some of your analysis particularly your fixation on semis. I think you are way off base in pounding the table on them. Fred Hickey says there has been a buildup in China as they are trying to build out their industry which will not help prices for others other than short term and not a big turn in semis and the market. Also, on gold who exactly are you taking shots at on the promos on gold? [Otto at IKN] says buy hold win and you are saying this is a blowoff and people saying stocks are overbought are not right either. Bill Fleckenstein, Fred Hickey and Jesse Felder are all taking opposite stance on semis and the stock market and I don’t consider them robots. I guess this makes markets. Still enjoy your viewpoints.

My response…

Exactly ‘L’.  This type of disagreement makes markets.  I don’t know who Fred Hickey is.  Is he a Semi expert?  I am talking equipment, which leads Semis.  Is that what he is saying?  I like Felder, but I have to go with price and technicals.

BTW, I am not pounding the table on Semis.  I only own one Semi related thing [profit since booked] and that is just a trade.  I am only saying that a signal that worked in 2013 – when everyone and his brother was bearish – is potentially in play again.

As for gold, I stand by my view that half the sector’s participants are brainwashed, only obsessing on gold, silver and the miners.  This has lost me subscribers in the past and will do so again.  But I have got to call what I see.  These guys were going off about inflation for years before WE, not them, managed (not called) the real bottom amid real fundamentals [which we did call].  Now those funda – price action or not – are going the other way.  It doesn’t mean the miners will not keep going up.  HUI’s next target is 251.  It does mean that there is a whole other world out there to be invested in if this thing goes ‘inflation’.

I would like to post this on the site if you don’t mind.  I’ll anon your name.  But I like the idea of getting some contrary opinions up there.

and…

Food for thought… I got [another] critical email from a subscriber on Sunday.  He is 100% opposite my supposedly bullish view of the gold sector and bearish view of the USD.

This is what happens ‘L’, when things get cooking.  Everybody gets invested, emotionally and otherwise.  I am just calling what I see and that is what you pay me to do.  I don’t care what Fleck, Felder, Hickey or even IKN have to say in the final analysis.  I have got to call what I see and then take the criticism when wrong.  Notice I didn’t write if wrong?  I will be wrong per your view or [the] other subscriber’s view in due time.

This is crazy time.  I plan to simply take profits, replant, take more profits and all the while keep a long-term plan in play.

BTW, I have never said the stock market is not over bought.  I also have called it over valued… very much so.  But in January of 2013, fresh off the Fiscal Cliff drama I’ll bet most of today’s bears were ultra bearish.  Then what happened?

That said, I am not at all sustainably bullish the stock market.  I am just keeping myself and NFTRH on the right side of the markets, and that includes the gold sector and commodities.  But things will change.  They always do.  Meanwhile, I am not going to tell people what they want to hear.  How can I, given the 2 opposing critiques?  Again, food for thought.

Further to the stock market, as noted in NFTRH I think that this rally extension, when it ends, will have proved to be bull trap.  Again, the service needs to keep a tighter focus on a weekly basis than simply setting it, forgetting it and saying the market will go down… eventually.

As for gold, it is not in a bull market because smart people say so or because others, who were bullish uninterrupted from 2011-2015, say so.  It may be in a bull market because so many charged opinions are flying around out there and emotions are running high (conditions in play throughout the 2001-2011 bull phase).  It is definitely in a bull market, along with silver by the simplest charts imaginable.  Indeed, neither metal ever exited its secular bull market.

But the red arrow on the gold chart represents the first ‘higher high’ gold needs to make in order to signal a new bull trend.  It and silver have done great work climbing above moving averages that were their cyclical bear market shackles.

But why not quiet down the noise, trade the miners (taking profits is legal, you know) at least to some extent, and wait for the macro picture to clear?  Or if you are a buy and holder, why not realize that royalty and exploration companies will likely do better than gold producers when the current quarter’s numbers start getting reported in July (ref. declining gold-oil ratio and still firm materials, stock markets, etc., i.e. aspects of the cyclical ‘inflation trade’ as opposed to gold mining’s preferred counter cyclical fundamental)?

The bottom line is that the noise and emotion I have tried to illustrate above are all part of what comes with an inflationary phase, when it’s all going up and the US dollar is going down.  Meanwhile, much though I wish it were otherwise, the market still gives a damn about the Fed and as we have shown in some of the linked posts above, there is still ample reason to believe the Fed is not permanently back in its box.  How can it be with inflation signals rising and just maybe, the positive Semi Equipment signal in play (however temporarily) as well?

With respect to NFTRH (and thus, me) I have been moderate about gold through bull markets and bear markets.  I learned early on it is the only way to survive, prosper and as a side benefit, remain relatively sane when dealing with the monetary metal in an age of monetary debasement.  That sounds counter intuitive, but this asset that just sits there retaining value really does stir up ideological debates and thus, human emotions.  Into that mix come the promoters, the manipulators and the best and brightest advisers, all ostensibly to guide the lowly individual on how to navigate the market.

I realize that some large percentage of readers (outside of nftrh.com) may either see my public articles and think ‘oh, Tanashian again; pass… I want some momo trading advice’ or simply hit a mental ‘dislike’ button because I seem to be critical of just about everybody.  But I never hide from those who are critical of me and I never hide from or get intimidated by contrary opinions.

I learned as early as 2002 to take in what other valid sources are saying and respect it, whether in agreement or not.  Back then Robert Prechter would routinely put the scare into my gold-bullish stance.  I held firm and became a stronger bull for it.  That still works today.  Valid opinions are always welcome but emotion (which some in the gold sector wear like a badge and/or use like a tool) is not.

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