In some ways the gold miner correction almost had to happen. So says the chart below.
A reminder here is that nothing is happening now that did not happen in the previous bull market. This appears to be a more pronounced version of the 2002 correction, which I actually remember well because it was the first correction I endured since buying my first gold stock in 2001. It was also the first correction of that bull market.
Earlier this year we beat the drum on the elevated risk as HUI had far exceeded the Gold/SPX ratio. That exuberance is what is being fixed now. If the inflationary phase of 2003-2008 is to be our model then gold could under perform or flat line vs. cyclical and/or inflationary assets for months, even years. HUI’s post-correction rallies were strong despite that and led gold all the way to the top in 2008. Then the miners liquidated because the corrosive effects of the inflation on gold mining finally caught up to the then over-valued sector.
This is not to say we have to follow that road map. With a big picture measured target in gold near 2800 the cyclical inflationary forces boosting stocks could fail at any time (it’s hard to picture SPX continuing to maintain its recent leadership if gold is going that high). But this chart says that even if the inflation continues, gold stocks should be okay eventually.
Here is the HUI/SPX ratio, which I expect to put in a higher low eventually. That’s a trend and until a lower low is put in that trend is intact.