Bueller? What is the difference between the precious metals rally of 2019 and the rally of 2016?
Well, for one thing in 2016 as gold stocks bottomed and turned up in unison with the ratio of the TSX Venture and Canada’s senior TSX we had an indicator that an inflation trade was in the making. Sure enough, by mid-year we had full on alarms ringing caution about the gold sector (even as the cheerleaders kept the troops hyped up on greed but precious little quality fundamental rationale). That was because things like base metals, oil and other commodities had started to eclipse gold’s performance. Worse-still, stock markets did the same.
So in H1 2016 it was ‘wheeee… gold stocks to da moon!!!’ as FinTwit’s foremost technology expert and gold honk (a veteran of our very own Rt. 128 Hi-Tech Highway, ha ha ha… ) was predicting gloom for Semiconductors, da moon for gold and a subscriber informed me he was quitting my service * because my stance was opposite to said tech expert (and luminaries like a well known former hedge fund guy and the guy with the flowing silver hair… name?).
But the caution proved justified and one of the early tells was that da ‘V’ was rocking right along with the counter-cyclical miners. On this cycle? Not so much. Early on in the gold rally (Q4 2018) NFTRH noted that we need
to not [edit: oof!] fear the disconnect in this indicator and others (i.e. the lack of inflation signals) on this cycle compared to the 2016 cycle because that one was ill-fated due to a cyclical inflationary situation (in which stock markets ultimately regained preeminence).
Okay, so at this website you have seen a lot of words lately about inflation. Da ‘V’ and its relationship with the TSX could be an early tell on that. So we watch it. But if you’ve spent the last 6 months worrying about the disconnect in this and other relationships you’re an inflationist gold bug and you never positioned to begin with. That’s because inflationist gold bugs are one serious collection of Wrong Way Corrigans, sometimes getting lucky but usually wrong for the right reasons.
The disconnect shown above for the current cycle is 100% in line with the proper fundamentals of the gold stock sector and when disconnects like this start coming back in line it will be time to begin fanning out beyond the gold sector into a world full of inflation trades. In the 2003-2008 inflation the miners did just fine, but they did it as their fundamentals steadily eroded and valuations steadily became overdone.
* As you may have guessed by now I never forget things like that. Be right, speak the truth, lose subscriber to more persuasive sirens’ songs… move on, but choke a bit on the irony.
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