alice

NFTRH; In-Depth Technical & Fundamental Gold Sector Update (high priority)

We can be sure by now that the sentiment that got so over bullish in February has been cleaned up. While it was not real analysis we used to decry the bullhorns who just could not wait another second to declare the death of the dollar and the ascension of gold (to $3000/oz. no less), it was intuition based on experience. We don’t need a sentiment aspect to this update. It is being cleaned up nicely, and the Commitments of Traders are probably improving in line as well.

Technical

We reviewed gold and silver with respect to their short-term bear flags and support targets in NFTRH 545. But the gold stocks have played some catch up to the downside, so let’s have a look.

HUI/Gold ratio (daily) took a hit yesterday but remains on its constructive perch. We need to see it stay that way.

hui gold ratio

HUI/Gold (monthly) is still constructive as well.

hui gold ratio

The HUI index has thus far held the channel and short-term lateral support. There is a gap down there to be respected, but it did serve to launch the index above the SMA 200, which could make it a breakaway gap (and as such, of less near-term concern). Still, we should be aware that HUI has not yet tested the SMA 200 and the way this sector moves, could test the 200 and fill the gap while it’s down there. The macro is after all, going against the sector lately.

hui

HUI weekly still clings to the EMA 55.

hui

Gold (monthly) meanwhile, continues to lurk in position to rally while silver shows no signs of anything (other than proximity to daily chart support and an improving CoT situation). I want to stay alert for a potential scenario where inflation expectations bottom, the yield curve stops flattening/steepens and silver takes over leadership from gold. Not to say that is the only potential scenario. Far from it, but it is slightly at the forefront now.

gold and silver

Macro/Sector Fundamentals

So about that yield curve. 10-2yr is flat as a pancake.

yield curve

Here is the longer-term view.

yield curve

Two possible scenarios when this indicator stops flattening and turns up.

  1. Economic contraction and quite possibly deflation. This would be where most cyclical assets get hammered and gold out performs with the miners eventually creating an intensely positive fundamental situation (though they could get pressured by the macro stress in the shorter-term).
  2. Depending on the yield dynamics driving a steepening, a global macro inflation trade could take effect. This is where we noted HUI went up 300% last decade while gold miner fundamentals degraded under the inflation. The investment view would be global and include commodities and resources. The rise in inflation expectations could take place against a cyclical backdrop, at least for part of the cycle.

Moving on, gold continues to decline vs. stock markets, after the mini blow off in December. This decline simply must be arrested before the gold stock sector can firmly regain its footing.

gold vs. stock markets

Gold vs. Commodities is similar. Last decade gold stocks often rose while gold declined vs. CRB, oil, etc. The thing missing here is that silver has not begun to lead gold. Until that happens, the pressure will be on the sector if gold is declining vs. cyclical assets.

gold vs. commodities

Gold/Currencies has taken on a bearish short-term look.

gold vs. currencies

The key here is “short-term” because gold vs. global currencies is still constructive (weekly chart).

Bottom Line

Okay, I guess this was in part a sentiment update, because even I did not realize at the time (February) the magnitude of the coming reaction as the sector got touted far and wide by its usual suspects. *

I am keeping my eye on the HUI/Gold ratio in particular to either validate or invalidate the gold mining sector, technically. At this time it is on a test but still validated. Silver/Gold ratio would be an indicator to an inflation trade and would be a positive for the sector. The yield curve continues to flatten and with that stock markets continue to out perform gold. The yield curve indicates a late cycle situation (at least for Goldilocks, if not inflation). But yesterday SPX did this vs. Gold.

How many days in a row are we going to ask whether these moves are bull traps as opposed to just bullish (but not for gold)? When the macro turns it turns. But as yet it’s cyclical, and as yet it’s not inflationary or deflationary. As yet, it’s Goldilocks signaling (a word I personally dislike writing, but have been compelled to write multiple times in the last two NFTRH editions). That is the one thing that must turn for a positive view to be restarted on the gold sector. Goldilocks must not be allowed back into the house.

* And by “usual suspects” I mean the alarmists, sensationalists and dynamic writers/video producers who consider it their job to rile up the troops every time something goes wrong on the macro and gold gets a pulse. There are plenty of sound, bullish analysts out there.