We dug up a reason to at least have a little healthy caution about gold (the gold price that is; I never worry about the actual metal and its value proposition) and now I want to dig up another on gold stocks, and in particular the HUI index. It’s something I’ve mentioned before, but probably not often since the 2020 crash as a potential downside objective. I am talking about a chart gap that is still open down around 100. In 2020 the crash halted at 142.51 after filling the noted 2019 gap.
First I want to discuss something. I bellyache a lot about gold bugs buying gold stocks as part of the inflation trades and how fundamentally wrong that is. Well, the flip side of it is that when the inflation trades liquidate (and really, has not the financial market bubble out of April 2020 not been a giant inflated bubble?) so do gold stocks. Very often. The average gold bug is an inflationist.
Now it is not to say that the markets (including commodities) are going to crash (e.g. next SPX objective is 3400) but it’s all on the table now, potentially. Bull, bear or utter disaster. The way I see it it’s all potentially in play. So, assuming a really bad scenario that catches everything up with it (except for USD and Gold’s ratios to silver and cyclical markets) and speaking as the guy who caught falling gold stock knives in 2008 at HUI 250 and then again at 150, I respect the 2016 gap. In a 3 month period HUI went from 480 to 150. What a crash that was. Epic. And if played right, very lucrative with a ton of patience.
So playing gold stock devil’s advocate, if Armageddon ’08 could bring it from nearly 480 to 150 can a macro crash scenario today bring it from 330 to 100? Yes. The other thing here is to illustrate the loss of the handle breakout that we noted back in April. The black dotted line shows that failure. I am not here to cheer lead, hand hold or any other thing the gold “community” is doing with itself right now. On Friday I noticed something that looked like it meant something bullish. But we should not get caught not considering other possibilities. The 2016 gap is one of those possibilities. Maybe not a probability, but possible in the right macro situation.
Indeed, the best buys in gold stocks are crashes if you don’t act too soon and can catch the slingshot going the other way. That is why I am really trying to amp up my patience with this market all around, from bearish and bullish perspectives. In my view this week holds the potential for a great contrary rally across several markets and it also holds the potential for a crash. Please don’t overreact to what I am writing. But if you’ve been measured and balanced all along maybe think about keeping on doing that.