This morning is a microcosm of what we’d want to see for gold, silver and PM complex in a counter-cyclical environment. Even as USD settles after painting a bearish candle yesterday commodities, global and US stocks and bond yields are all pulling back while gold and silver are positive.
This update is not to get hysterically bullish about gold and silver based on one pre-market situation, but given that our reason for closely following the precious metals is for their counter-cyclical aspect, we will especially take notice on how they are doing when the broad asset markets hit turbulence. Signs of late are that they are disengaging from the greater inflation trade.
Here is how HUI ended yesterday per the chart from Wednesday’s update. It held the green trend line and lateral support.
Moving to a daily chart we can see the reversal candle from yesterday that poked the support area and held the key 170 level. If yet another bounce in the jigsaw shown above is in the making I’d plan on around 190 as a minimum objective. That’s a cool 20 points from yesterday’s low. If Huey rallies and it is just a bounce fated to make another lower high, 200 could be quite doable as well.
However, the reason I hold some positions (and added back BTG and AXU over the last 2 days) despite what had been a S/T bearish view since HUI hit resistance at 190 is because I am waiting for this sector to be special. Notice how HUI declined from 190 as the stock market kept rising (until 3 days ago). That was opposing action and not a negative if the stock market goes bearish for a phase.
As parroted repeatedly (against the perma pom poms out there) the gold sector is not at all special when it rallies with other participants in an inflationary asset market rise. It is special when things fall apart, and even then you have to be careful because as in Q4 2008, the miners are completely capable of liquidating (despite rapidly improving fundamentals) before providing a massive buying opportunity. That would be the inflationists puking out.
What does the sector have going for it this time vs. Q4 2008? See below…
It is now in its 20th month of consolidation after the big 2016 up surge. That consolidation has weaned the sector off of the inflationary backdrop (even as it often rallies with it in short-term spurts) and that is a good thing.
The point being, the topping pattern built in 2007-2008 was the peak of Greenspan’s inflation-fueled bull market that began in precious metals in 2001 but then fanned out to commodities and stocks. Resolution was harsh and decisive. The topping pattern from 2009-2012 (what I used to call “Mr. Fat Head”) was the culmination of the balls out inflationary fire hoses sprayed on asset markets 24/7, 365 days a year to address the 2008 crisis, which itself was created by the Fed (so you see why NFTRH is so named…). Resolution was harsh, extended and a grind; a primary bear market after 2008’s quick cyclical one.
HUI topped about 6-1/2 years ago, made an impulsive leg up 2 years ago and has been consolidating that for 20 months. In other words, it has been doing the work that stock markets, the primary beneficiaries of the current inflation cycle (with a side of Operation Twist), have not been doing. So again, this is why we should note the sector’s opposing action (to the stock market) when it occurs.
As to the consolidation on the chart above, even if HUI does take a leg down for a final flush, it would be nothing like 2008 and it would be nothing like the 2013 leg down. My point here is that we would-be gold bugs need to stand ready with our greed on full display. But we need to be intact and sensible when doing so. I’ve held the items I’m willing to hold through bearish price action and depending on what the broad markets do (along with the precious metals’ opposing action theme) I am ready to buy more.
As for this morning’s bounce, gold is at 1323, which is also its 50 day moving average. Silver is at 16.45, well below its SMA 50 (16.81). So let’s not get excited. Let’s rather just take it a day and a week at a time and develop the narrative. The first thing we had to do is shake off these accursed inflation bulls. After that the more satisfying work may begin.
We’ll chart sector fundamentals and individual gold/silver stocks in the weekly report if/as the situation develops.