NFTRH+; it’s a ritual… prepare to capitalize

Pardon any typos, funny wording or confusing concepts you may encounter. I wrote this quickly and will edit it after. If you have any questions just pop me an email.

First of all, if this is the reason the markets reversed well then it’s all hype. In NFTRH 683 we noted that preferred major index pullback levels were lower. It’s like an excuse for indexes to do what they are supposed to do, which is take a decent correction per the charts of SPX and NDX in #683. We already knew that the thing was going to spread globally. The question, as noted in #683, is in the danger level it may or may not pose.

If Omicron is the reason markets reversed today I would not be surprised to see them pop again tomorrow. It’s like a sentiment pogo stick out there.

As for gold stocks, which is the main reason I wanted to do this update, it’s a ritual I have come to enjoy in a perverse way. After repeating endlessly that gold stocks should not be rising with cyclical inflation trades it is no surprise that when said trades drop or fail the gold stocks come under pressure. I plan to hold my core and maybe one or two extras but with the macro puking inflation at the behest of the all powerful Federal Reserve jawbone and its sidekick Omicron, what is happening now is logical and the stance – insofar as one is a gold stock player – should be one of positioning to capitalize. It’s why I’ve kept high cash.

Whether the inflation trades are broken or just being interrupted (both scenarios we’ve anticipated), they are getting hammered. If you believe in a structural inflationary regime in 2022 and are an investor you may be holding on. If like me you are not at all convinced that the inflation will not fail for a longer than convenient period (guideposts being the USD, Gold/Silver ratio) you are taking caution.

I want to be positioned for either outcome. A reality of the gold stock sector is that they are often sold by the inflationists even as their fundamentals improve. Q4 2008 was an extreme, table pounding example of that as gold sky rocketed vs. commodities (incl. obviously oil) and eventually stock markets too. That was gold’s utility as a liquidity haven taking over from its under performing utility as an inflationary vehicle. Gold mining fundamentals rammed positive even as the stocks crashed.

That is a dramatic version of what may be taking place currently. If inflation signals continue to drop gold will out perform oil and other mining cost input commodities. That is a real buy as opposed to a ‘me too!’ sort of inflation trade buy where we’ve noted gold stocks are nothing special (at best).

Anyway, HUI and GDX are still not broken from the short-term bounce/uptrend, not having made a lower low to the early November low. But GDXJ has, as has silver. I don’t like that.

Recall that we have targets of 212 and 185 still open on HUI. At 212 a gap would fill and 185 is a measurement from the April-July bearish pattern. Those do not need to stop a decline, but they are the next targets, each capable of being a bottom. As yet, HUI is clinging to that higher low.

I’ll plan to update the inflation/liquidity indicators going forward but we are all doing the dance the Fed wants us to be doing right now and my point today is that a lot of the dancers are people who see gold as silver as copper as oil as tin as hogs. In other words, all part of the anti-USD inflation trade. As a side note I guess we are finally seeing the result of the USD dollar’s negative divergence to these trades for all of 2021.

Bottom Line as pertains to gold stocks

If they break down amid waning liquidity and failing inflation signals, they will be a buy at an appropriate time. Now, certain inflation markets (e.g. CRB index) are dropping hard but not yet broken from the major uptrend. So if they hold and the inflation trades are just taking a pre-santa taper tantrum so be it, the miners can resume upward as well. But the best buys in the sector are when everyone is running hard from inflation trades.

Here is a chart with some ratios that would indicate a positive fundamental (if not yet price) environment for gold stocks if these items keep rising. As of yesterday Gold/CRB and Gold/Oil had already started looking constructive. Today’s activity is still on that message as well. The TLT/HYG ratio is a proxy for a credit spread, with the signal being that players are running for quality and speculative market liquidity is waning. TLT/TIP shows a waning in inflation on the very short-term.

It could still just be a pre-Santa whipsaw, but I am going to respect market signals and generally preserve capital until relief comes or until things break, which would put the gold stocks front and center.