NFTRH; Copy of Email Response About Deflation & the Gold Sector

Hi folks,

I just responded to a subscriber who questioned what effect a deflationary episode, if that is what the China/Virus situation instigates, would have on the gold sector. Understand that I simply answered his question as posed. I am not making an assumption that the Coronavirus crisis will prove deflationary. It could well be the opposite, depending on how well our Central Banker friends are able to respond.

But with the assumption of deflation, not that I know everything (I surely don’t even come close), but I simply recall experience and as such, below is my answer for anyone else interested.

Aside from that, we reviewed our daily chart parameters on HUI earlier in the week. The sector is looking weak at the moment, but HUI is nested right on its SMA 50. If it’s a bullish Cup’s handle, we’d look for a drop to around 220. But any lower and then it gets worse. I’ve done some lightening up (also in broad stocks) and am evaluating, which we will surely do this weekend in NFTRH 589. It feels like a time to have comfortable cash.

Here is my thinking on it.

Deflation will pressure precious metals, especially silver. And very often this leads broad markets as well. Although the US has had a stubborn habit of spinning Goldilocks (due to the firm dollar) while the rest of the world suffers. That is why I’ve been noting that the gold sector is not going to [be] “set free” until US stocks crack. And even then, things don’t necessarily make sense in real time on any given day.

But this is the important point. The gold miners do not like inflation, fundamentally (even though they can rise significantly when an inflationary tout [is] in play). Gold bugs will often tout the opposite, but it is the deflationary phases that fuel the gold mining industry’s fundamentals (even as the stocks may get whacked) because gold will perform better than cyclical assets in a deflationary or disinflationary environment. But again, things don’t happen in real time. So patience and risk management are needed.

But reference 2001, 2008/2009 and as a microcosm, Q1 2016. Gold and the miners led the whole reflationary raft of asset markets at those times. I have preferred and still do prefer a disinflationary backdrop if I am a gold bug. But the stock market needs to crack and then the inflationist gold bugs would need to be bled out. That’s typically a buy situation.