NFTRH; This Week’s Indications on the Gold Sector (high priority)

With interest rates making big headlines so too will dollar-bullish headlines come about. Any short-term weakness in the gold sector would theoretically be the ‘anti-USD’ gold bulls selling out. That is fine, as you know I have groused enough about the gold stocks going up with the general global anti-USD trades, which appear to be resuming their downtrends.

But let’s take a snapshot of the actual fundamentals that will be more important.

  • As noted in this morning’s Macro Amigos update, the Yield Curve has bounced on the daily chart. This is the kind of bounce that kicked off the February asset market correction. It is positive for gold and the gold sector.
  • Also covered in the update was the SPX/Gold ratio, which is in a steep big picture uptrend but which is dropping today. As with the Yield Curve, it’s a counter trend move but bigger moves would need to start somewhere. As it stands now, there are some pretty ugly index charts out there but the US stock market is generally still trending up. Some major indexes are close to signaling a break of short-term trends, however. SOX, RUT & even NDX come to mind.
  • Gold is thus far on a small bounce vs. general commodities and importantly, oil. Here lets reference the Gold/Oil ratio chart we reviewed on page 39 of NFTRH 519. If this bounce were to become something more (easy now, let’s have balance) the implications would be very positive on the big picture for gold mining companies.
  • The economy is fine, and most observers credit the big rise in long-term yields to that very fact. But again, change has to start somewhere and I think the market knows that a serious change in the declining yield continuum would be very bad for US and global economies stoked on cheap and abundant credit. So give it time. As noted in the update linked above, I am not sold on the idea that the declining rate continuum is changing for real. Thus far this is in-month hysteria (ref. Q1 2011) on a big spike in yields.
  • Also, as an extension of the above confidence would decline if the economy starts to falter. Again, give it time. These are laggard indications.

On the inflation front TIP/TLT is breaking out while TIP/IEF is not. The idea here is that the further out on the curve the more concerned about inflation bond players are. While the global inflation trade (incl. commodities) is taking a hit rising yields need not be bad for gold – and indeed quite the contrary – if the yield curve is steepening. Again, it’s only on a bounce but this week’s curve signaling is positive so far.

Wouldn’t it be interesting if the anti-USD ‘inflation trade’ reverses and eventually leads yields back down to a false breakout by month’s end as has been the case in every instance over the last few decades (again, ref. the update linked above)? Let’s also consider the wildly contrary bullish Commitments of Traders and Public Optimism data on 10 & 30 year Treasury bonds. I am not predicting the outcome but I sure am keeping us aware of the alternative to today’s yields hysterics.

Such a failure in yields and an attendant decline inflation expectations, if it comes about, could hit the precious metals sector too, depending on the proportion of inflationists that could still be hanging on. But that would be a “real” buying opportunity for the right reasons (fundamentals), as in Q4 2008, although I doubt anything as severe is in the works.

Apologies if the above is a bit rushed or muddled. I will try to be clearer in coming updates and reports, but wanted to get some initial thoughts out there as this fast moving situation develops.