This morning is interesting. As we have been noting, there has been a contrary setup in the bond market and we are watching for a potential failure in long-term yields. If that plays out with Treasury bonds rising it would be consistent with a more traditional risk ‘off’ situation, which would be consistent with a positive move in the fundamentals that matter for gold and especially the gold stock sector.
This morning bonds are up, US and global stocks are down big (apparently choosing ‘continued correction’ over ‘bounce amid over bearish sentiment’). That’s all we ask, is clarity. Down in stocks and the risk ‘on’ trades is the preferred direction to bring in the precious metals’ counter cyclical fundamentals. Of note, gold is up 1.4% in pre-market and oil is down 1.4%.
Ref. our Gold/Oil ratio (GOR) chart and its implications should gold start to rise in terms of crude oil. To review, on previous cycles gold stocks (HUI) became very over valued in terms of the ratio of their product to one of their cost drivers. When HUI rose against a flat or declining GOR the sector became very vulnerable. In declining along with the GOR since 2016 the sector has been building in potential value, assuming GOR is to hold its long-term uptrend by turning up again at a higher low to the 2013 low.
As for gold vs. other commodities, stock markets and currencies we’ve been noting that change would have to start somewhere as far as improving the charts goes. The daily charts have taken a big jump and if this continues the longer-term weekly charts would eventually start to trigger their positive signals.
Amigo #1 (SPX/Gold ratio) has come to a big picture resistance point that we have targeted for years and maybe this is it, the macro change that most will not have expected but we will have anticipated.
As for the stock market, if this correction resumes our best target for the S&P 500 is 2100-2200, which would erase the entire Trump rally from 2016 and possibly create a big buying opportunity. Meanwhile, I love dividend-paying cash equivalents and will probably try to short a few items. I want to hold quality gold stock positions and add on opportunity (assuming this is not all one big fake out to the downside in broad asset markets) and some speculative ones as well (tax loss season may pressure the little crappers). Gold miners leverage gold’s counter-cyclical leanings in their operations.
If the market pressures them, so much the better as far as buying an item with potentially vastly improved fundamentals is concerned. If not, they can be added on opportunity because if this turn in the macro is real, it is not likely to be a quick process.
The gold stocks are positive in pre-market (but still indicated to be in the consolidation handle of the last week) and as the chart above implies, they are not burdened with the valuation overhangs of previous cycles. This could be the moment gold bugs have been waiting for since mid-2016 and longer.