We are at the crossroads to the potential end of the reflationary relief trades that have been ongoing since March. These relief trades were led most intensely by the slingshot recovery in gold mining shares and also big Tech. Unless the Silver/Gold ratio is going to rip through our best upside target, which it hit yesterday, this could also be the beginning of a stress phase in the markets, a time of correction.
That would be indicated by the state of gold in comparison to stock markets. While still technically in consolidation Au/DJW (daily) broke above its SMA 50 yesterday and is looking up at the resistance shelf again. Break through 4.60 and we could call the global macro relief phase over.
Gold/SPX is in a similar situation as it breaks a second fan line and takes out the SMA 50. The major trends in both of these ratios are up (SMA 200) and so this extended pullback has been labeled a consolidation, not an ending of gold’s rise vs. stocks. An upward break of consolidation in these ratios would be the resumption of a new up phase in gold’s ratios to cyclical, risk ‘on’ assets. It would not be pleasant for most of the macro markets and it would not be inflationary but instead, dis-inflationary or deflationary.
Right in line with that message is the TIP/TLT ratio, an inflation gauge that looks like it began a new failure from a bear flag yesterday.
Gold/CRB index is another up trending ratio that has been in consolidation. It is one way of discerning a ‘real’ price of gold. It too may be poised to break consolidation. It would rise during deflationary and/or risk ‘off’ times. A rise in the gold price vs. energy commodities and cyclical
materials metals/materials is fundamentally positive for gold stocks, which fundamentally leverage gold’s counter-cyclical bias.
We hit an extreme this week as evidenced by silver finally getting on its horse (and technically entering a cyclical bull market above the 2016 high) and the Silver/Gold ratio bashing its way to our best target and halting right there. The miners began diverging and it could well be that they are doing what they usually do, leading the macro, this time into a corrective mode.
As noted previously, I don’t necessarily expect the gold stock sector to get whacked anywhere near as hard as they did in March even if the stock market does get hit as hard as it did in March. But there could be continued pressure.
It is important to remember that with the gold sector, often times the corrections are brought on as the fundamentals, like those shown above, begin to shift to positive after gold stocks have rallied during phases of fundamental degradation (like the post-March macro relief phase). My handy view of this process is that when this pressure comes on against a fundamental backdrop turning positive it is actually the legions of inflationist bugs selling as they realize the inflation is failing. Hence, you get to buy gold stocks as their (counter-cyclical) fundamentals improve. I like that.