Gold mining is a counter-cyclical business. During economic (and inflationary) down cycles gold out-performs industrial metals, oil/energy, materials, stocks, etc. Insofar as commodities and materials contribute to gold mining cost structures, you can see that in economic down cycles amid dis-inflation the miners get an inherent bottom line boost as the product out-performs the cost inputs.
As for stocks and public confidence in general, when those things decline during hard economic times that is a macro fundamental positive for gold mining. It’s psychology if nothing else. Casino patrons tend to rush for gold (after they initially knee jerk into US dollars and Treasury bonds) when risk is ‘off’. Gold out-performance to stocks naturally would bring on an interest in gold mining (as their costs are declining and bottom lines growing). That’s the theory of it.
But if we are going to go on an inflationary extravaganza the gold miners can still rise while their fundamentals worsen (blueprint: 2003-2008 when gold mining funda degraded but HUI gained 300%+). Don’t count on me pulling out my pom poms, however. Count on me playing it with all due caveats and lack of cheer leading.
But what if the market tops in the next several weeks, or next couple months? Check out this post including Tom McClellan’s timing chart (using M2). What if we hit a timing window like that with AAII screaming over-bullish and just maybe even the SPX 4600 target somewhere in sight? I don’t often try to call tops, but that would really be tempting.
If that were to happen, don’t expect commodities to continue to rise without global stock markets. Instead, expect a correction at least. A hard one, if stocks really make an important (though not necessarily terminal) top. I would not be necessarily be calling an end to the stock bull (or commodity rally) but within this scenario we might see the counter-cyclical gold sector end its correction for real.
In yesterday morning’s update we projected HUI’s pullback to 280 (if not 273), which is the 38% Fib retrace level (273 is a 50% retrace). Today’s activity seems to be right on plan. We have had all due warnings not to be pom pom waving gold bugs as the bounce was due for a cool down. But speaking of plans, mine is evolving as the markets evolve.
First of all, on the micro I prefer the gold miners to be dropping ahead of FOMC rather than rising into it. But on the macro, let’s remember that the big picture shows one counter-cyclical sector lagging everything else, even after initially leading the big relief out of the 2020 market crash.
What if broad markets do hit a big correction in the coming weeks? Well, the miners could be set up to lead the way out of it again, especially since they’ve already done a lot of downside work.
If you assume good fundamentals that a pullback in inflation expectations and positively correlated markets would bring, this chart is and has been a thing of beauty. What’s more, it is doing exactly as we’ve projected in that it corrected from the ‘C’ point of the original 2019 A-B-C bear market rally projection.
I put some negativity into NFTRH 652’s precious metals analysis and we’ve been calling it ‘bounce only’ all along. So I feel like we were well prepared for the short-term pullback going on now. I tend to get a little emotional (in this case disgust) when I see gold touts touting, especially massively followed touts on Twitter. But I have to be careful not to be too sensitive to it, because honest analysis is my job, not nannying people about gold promoters. In short, just because I don’t like a lot of the gold touts out there it doesn’t mean my fundamental (or technical) views should be distorted by that emotion.
Hence, with suitable levels of caution already expressed, I want to note that the chart above, if combined with a coming (at least interim) top in the cyclical world could easily load the next target of HUI 500, with whatever low gets made (or already has been made) becoming point ‘4’ of a 5 wave bull market. But you can check that with an Elliott Wave theorist. I just like pretty pictures… and good fundamentals.
