alice

NFTRH; Falling Into Place (Priority: Medium)

The title of the post is purposeful in that things are falling this morning. Stocks, yields, commodities and precious metals. And drops in stocks and commodities would be needed in order to paint a bullish fundamental backdrop for gold and gold stocks. Yields are a different animal, in that the state of short-term yields vs. long-term yields (yield curve) is most important, but when they are falling it is generally better for gold as well.

One thing not falling is the US dollar, which would bring about the pain in many areas of the various global inflation trades that we have labeled “anti-USD” in one form or another since Q1 2016.

Stock Markets

The US market popped yesterday as we thought it might, so as not to make it too easy on the bear case. This morning it is in the red and keeping our preferred theme of post top-test pullback/correction intact. Some sectors like Healthcare (relatively defensive) and Retail (aided by firm USD) are out performing, but in general we want to see the broad market top out for a correction (at least) if we are going to change the macro.

Global stock markets continue to be weak and the theme there has been in the form of a question: How long can the US stock market hold out against a bearish global picture?

Yields

With the pullback in stocks and commodities interest rates are pulling back as well, which is logical. This is what you want to see if you are trying to turn the macro defensive and risk ‘off’. Herds flocking to the very instruments the media told them to revile (and boy did they obey the media) just months ago. We’ve noted a positive contrary sentiment backdrop for long-term bonds, which would imply a near or intermediate-term decline in yields.

Commodities

Commodities have been noted as bearish nearly across the board, with a few exceptions like Uranium and Crude Oil. Oil is however painting an unattractive chart. Despite the pain in nominal gold, its ratios to Palladium and Industrial Metals have retained constructive looks. In other words, a caution signal for the inflated global economy has remained intact.

Precious Metals

I am so glad not to have to be downplaying this sector anymore. If (and please note the word “IF”) the macro turns as expected, a swan dive in gold, silver and the miners would be an opportunity to buy cheap what future inflationists will buy dear one day. It’s a long view situation because these things do not usually play out in convenient time frames. But it appears a climax of some kind is out ahead.

We laid out downside parameters in yesterday’s update and with the failed bounce yesterday it looks like the capitulation will resume. Again, waterfalling gold stocks is not a reason to buy gold stocks. But waterfalling gold stocks amid a backdrop that is turning constructive, is.

Bottom Line

It’s only a few days since SPX hit target. Here we have to call upon a lot of patience as the thing grinds up and down to keep everybody on tenterhooks.

But if gold bug pain becomes everybody’s pain we’d want to be in position to be brave and resolute among the stampeding herds. If the time comes where stocks and commodities are firmly in correction, yields are firmly declining (with the yield curve rising) and the gold sector is tanking to extreme downside targets it will be recommended to have a list of favored precious metals vehicles at the ready. We are stalking this thing now.