NFTRH+; unfinished business, T-bill/gold/miner correlations & risk/reward

Let’s use a talkative chart to explore something interesting. First a couple qualifiers…

  1. We’ll exclude a large part of the chart, which was the 2009-2015 ZIRP (zero interest rate policy) eternity sick joke played upon the markets by Ben Bernanke. During that time the precious metals rocketed upward and then gold corrected and the miners crashed of their own valuation bloat and poor business execution (not to mention the US ‘Goldilocks’ economy).
  2. There was an anomaly in 2016 as we had to call the precious metals rally illegitimate by May that year because a whole host of cyclical and ‘inflation’ markets started rising right behind the precious metals that year. That was a prime example of inflationist bugs getting excited and then getting killed (2 more years in the desert until the 2018 lows).

Aside from that there were 3 examples of tops in the 3 month T-bill yield (IRX) and bottoms in gold and gold miners. The first, in 2000 was the start of a big bull market. The second was a strong rally prior to the 2008 crash. The third was the recovery out of the COVID hysteria. The first example was obviously the best, the most purely bullish after 20 years on the outs. A new bull market. The other two were quick cycles prior to disaster (2008) and a long 2 year correction in force to this day.

Regardless of what the next pivot point is (bull market or rally), it is likely to be robust. As for the unfinished business, you may recall some thoughts I had about the yield curve completing its unfinished business as its inversion was interrupted in August 2019 in the run up to the pandemic and in 2022 is finishing and likely has finished its inverting business.

Well, how about the IRX, which is a primary guide for the Fed Funds rate? What if it’s not a whole new paradigm in the bond market (at least on the short end) but instead a reaction to whatever high IRX/Fed Funds were going to make in 2019? Gold bulls bitch and moan but this chart says they should be correcting. What’s more, it also says that risk vs. reward is low and we can expect a bottom at any such time as the Fed wrecks the financialized economy to the degree that cyclical markets give way (well in process) and economic recession ensues (possibly already happening or coming soon).

The message of the chart is that there will be a rally in gold and gold stocks at around whatever point the Fed pivots dovish (it’s a monthly chart and there is ‘play’ in the timing +/- a few months). Over eager players thought that might be this summer but that was just the rationale for the summer b/s rally, which we anticipated for that very reason (hopes of fading inflation and a dove-pivoting Fed) along with terribly bearish sentiment.

Regardless, the Fed is still hawking to no great surprise as we’ve noted that they will make sure they kill inflation before they back off. If inflation were to get out of control the Fed – in my opinion – goes ‘bye bye’ as an entity to be taken seriously.

In NFTRH 721 we reviewed a couple of downside targets for HUI and in other updates we have also highlighted the possibility that last week’s drop to a new low may have been the bottom. I lean toward further downside but I don’t have much doubt that risk vs. reward is positive. If the black line above (IRX) is simply seeking out whatever level it was heading to prior to the acute pandemic, we’re looking at some lower high to 2007, with the 2019 high possibly rendered much less significant than would have been the case had it not been chopped down by market panic and economic shutdowns.

Let’s think about these elements and keep them in play. It’s a lot of confusing information but things are making sense here. It actually makes me very greedy as I try to balance patience (no telling where the PMs will bottom) and perish the thought… enthusiasm.


This Post Has One Comment

  1. Armen

    10Y/3M is not inverted yet. Such inversion is often indicative of the top in 3M, but this is based on data during the downtrend in 10Y yields (from 80’s). Unfortunately St. Louis Fed charts do not go far enough to see the behavior during period of rising 10Y yields (50-70’s).

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