As I have belabored over the years, the same implications that can spur a rising US dollar can go hand in hand with a bullish case for gold mining. That is because ‘inflation trades’ tend to drive gold’s price down in relation to oil, materials and in some cases risk ‘on’ items like stocks (although gold has been stair-stepping higher vs. the S&P 500 since December 2017).
In Q4 2008 gold declined, the gold stock sector crashed (liquidating the previous excesses of the fundamentally poor 2005-2008 inflation period) but eventually they both went up with the spiking US dollar. That is why I cringe when media start beating the war drums about gold (and especially gold stocks) during inflation, when risk ‘on’ and/or pro-cyclical assets are rising. At best the sector is an also-ran in that circumstance.
Without getting too wordy, below is clear evidence that since the macro was switched from US monetary policy intensive to fiscal policy intensive, the HUI/Gold ratio (HGR) and the USD have traveled a similar trend, right up until the last few weeks when HGR and USD have risen together. I won’t pretend to know how the near-term macro is going to unfold but I will tell you that the miners’ ratio to gold and the US dollar are on similar post-election downtrends.
Now, what happens if by some chance the USD rallies for real and liquidates the inflation trades (including stocks)? Gold stocks could of course take the expected liquidation or they could hold up because the inflationary excesses of 2005-2008 are not built in. But this is evidence about why I am always going on about counter-cyclicality. Eventually that counter-cyclicality would enter the miners’ bottom lines and investment case.