NFTRH+; Devil’s advocate on gold

I believe the macro is swinging to be positive for gold because things are falling apart left and right as the Fed is compelled by market forces to do what it tried hard not to do; fight the inflation it created at the expense of financial markets and eventually maybe, the economy.

Last week we may have seen an initial sign of the beginning of the next phase in gold and gold stocks. But as already noted in NFTRH 709’s summary…

No real change except for the fact that the sector got clubbed on CPI (no surprise) and bounced back hard that same day. I don’t want to overreact, given the policy egghead brigade coming up this week. But I sure do not want to under react either. It feels like a potential pivotal juncture for the precious metals complex. It won’t happen in a day and it will be violent. But Friday felt like a scout, a sentinel, a signal for the future as the sector (on average) bottoms in July.

So I am going to operate accordingly with Q4 2008 as a personal reference, when I started buying gold stocks too soon when HUI crashed to 250 and then gave it all I had at the ultimate bottom, at HUI 150. Believe me, during the intervening 100 point downside I was wishing I was all cash. Sure, big picture it turned into a fantastic trade, but I am older and less tolerant now, if not wiser.

So the point is that just because fundamentals are coming in line, timing is a whole separate issue. The prompt for this post? I found the chart below in the chart list and it has a negative message for gold. As with the Yen/Gold correlation noted in the Currencies segment this correlation between the CPI/10yr yield ratio  and gold has broken a relationship that over the years has often been fairly well in line. It could stay broken or inflation expectations could tank with the markets and cease the Fed’s panicky hawk regimen, relieving the downside pressure shown on the chart in the CPI/TNX ratio.

Another factor is that this chart is dated April 29, so it is 1.5 month old data. But as we know CPI has continued firm and yields have resumed rising. The ratio of the April 29th CPI to today’s 10yr yield is 8.84. So it’s lower than shown.

All of this may be noise, with events to come potentially changing the picture for the better in the case of gold. In fact, that is what I think is happening. We are looking at what has been and what is ahead is going to be much different. But it is a picture that was true on April 29th (originally reviewed some months ago) and is still true now. It is – if this correlation means much – a negative indicator for gold (among all the developing positive ones). We can take a little negative input and not wig out about it, right? I’d rather see it than pretend it’s not there. Especially where holding any gold stocks in the near-term may be concerned. I am not going to let them break down (if applicable) without taking some action.