The party is on. Yesterday not only did the gold stocks (leaders out of the March lows) get a pullback but so too did the remote work/buy/communication/healthcare software/tech stocks. In a genuine sentiment event continually instigated by the Fed’s willingness to print the US into a Banana Republic the most popular asset – the stock market – is taking the ball and running with it. We have seen this movie before, repeatedly.
Gold
Gold was the easy winner coming out of the crash. But now, as risk is compelled to go ‘on’ risk off gold gets kicked to the curb by casino patrons now FOMO’ing stocks again. Most gold bugs believe in monetary honesty, and that is why they get upset at times when it appears the forces of dishonesty are winning. But it’s the markets. Never personalize it. Look at it squarely.
Gold (daily) has had an ongoing negative divergence by RSI and more recently put in a lower price high, which is not a good thing. It is however, still at the initial support we set for it and the SMA 50 (blue) has risen to meet that support. Gold is trending firmly up and as long as support holds the measurement from its pattern is 1940 (+/-). But if it does lose the SMA 50 (1683) be prepared for another test of the SMA 200, which has now risen to support in the 1560s.
If the reflationary (see gold/silver ratio, last chart) party persists gold could take a hit within its uptrend. Meanwhile, support is at hand.
Silver
Meanwhile, silver has done some great work. After the false breakdown that shook everyone out and got them all beared up (14 is a key long-term support not shown on this daily chart) it has staged a big rally, which appears ongoing. The trends are basically neutral but as long as it stays above the SMA 200 (16.98) it is biased toward the bulls. RSI and MACD are in good shape. If silver clears 19 it’s in business. Now, if gold remains under pressure will it also pressure silver or is silver going its own way for a while here? Watch the SMA 200 as support.
Gold/Silver Ratio
The Gold/Silver ratio has been declining and the solid and dashed red lines represent the broken long-term breakout markers. But the real test will be the rising SMA 200. That would see the GSR at 93. In its decline this indicator is 100% in line with the increasingly reflationary relief rally going on in US and global markets. Despite silver’s recent bullishness and possibly its forward prospects this looks like an oncoming caution indicator to me. Punch drunk stock market bulls will not look at things like this but its message is to simply state that the risk vs. reward is a lot worse now than when the world was ending at a GSR of 125. It is closing in on what appears to be a low limit (93).
Gold Stocks
Regarding the gold stock sector, those who have been around it a while know that it often leads the broad markets downward, just as it had led them upward out of the March crash (and out of the January 2016 lows, and the 2001 lows and the 2008 lows, etc.). They also often correct against a rising Gold/Silver ratio. A correction in the miners could precede a broader correction of the inflation/reflation trades and broader markets and a new rise in the Gold/Silver ratio. Given the risk on risk ‘on’ I actually like that the miners are struggling now against a party atmosphere in stocks. That begins the process of untying them from broad market risk.
Also, did you notice the US dollar’s bearish move yesterday? And yet the miners went down hard! The reflation rally is lifting the cyclical items for which policy makers are trying to weaken the dollar. If it works, great, we all enjoy our new Banana Republic and associated paper asset gains. If it does not work and the GSR and USD rebel once again the gold miners will again be set up for the next phase.
Remember that per the Gold/SPX ratio with HUI chart and this post the miners got too peppy compared to the Au/SPX indicator. The gold sector will probably need to see the stock market party come to an end or at least start to struggle for it to present the next firm low. I think that is what is in play and the Gold/Silver ratio above is one indicator to watch for the party’s end.
Alternatively, if the GSR breaks down we would enter the inflation/reflation phase sooner rather than later and while the gold miners might and probably would hold their own for an extended period, they would be rendered just another item among a portfolio full of options.
Instead I think that the next phase of the contraction (and gold mining fundamentals) is out ahead. But this calls for open minds on other options because the Treasury backed Fed is in the game and they are not screwing around. They want balls out inflation to bail this mess out.
Finally, a brief note on HUI was posted in the Trade Log Notes yesterday along with a daily chart showing the 250-260 support area we are watching.
