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Gold Is Going To Correct

It has to, right? Yes, of course.

The “literal” linear scale monthly chart says so. It’s gone vertical, RSI and MACD are wildly overbought to or through historical levels that brought on corrections, at least. A growing legion of market participants seem to think that gold is blowing off much like silver did in 2011, and will enter another bear market.

Well, the same chart in log scale, using percentages, indicates that the bull is likely only getting started, with much more to come after the next correction comes at what ever point it will (see the Global Markets segment for a look at DXY/USD, which would be a catalyst for a gold correction if it were to bottom and bounce).

And then there is this chart, which I keep front and center to remind myself of the macro that was, robo-inflated by a 20 (+/-) year run of bubble making by monetary and fiscal policymakers, and the macro that is, post-bubble, with gold like a beach ball held under water, finally released.

Gold/SPX is on a spike, which with not much positive macro news (on trade, war, earnings, what have you) could be repelled if the stock market’s rally, bear market rally (BMR) or otherwise, has more upside off of the recent mega bearish sentiment extreme. But the main takeaway of this picture is that gold has a lot of catching up to do in its bull market relative to SPX. It is only now coming out of its base.

To my eye, the situation in Gold/SPX looks like the initial move in 2000-2003, fitting nicely with other aspects of our 2001-2004 analog theme.

If we cast the view out to the entire precious metals complex, including the not-overbought silver and the fairly well overbought gold miners, we see buying opportunities ahead on price pullbacks. If the macro has indeed changed, which I see no reason not to believe.

And when gold corrects from this vertical run, it is likely to be intense, possibly scary for FOMOs who jumped the train or don’t value gold unless its price is rising. The precious metals do not move gently, in either direction.

Yet, who is to say when the correction will come? Had it come at the original target of 3000+ (roughly 3050) and someone playing the “price” of gold had sold, there might be some regret at 3300. The same goes for the miners, with respect to the HUI 375+ target. Huey hit a high of 414 before recoiling to 399.

Our recent theme has included “animal spirits”, or MOMO/FOMO, the likes of which can drive a market higher than you think. It would actually be healthiest if the sector would correct now, rather than building more MOMO. But as we have noted in recent weeks, point 5 of the bull market appears doable on a shorter-term than originally anticipated back in 2023.

If that is the case, and if there is any dent in the macro-fundamental backdrop whatsoever, this monthly chart holds the potential for a significant correction from 500 (+/-). HUI has already made the key “higher high”. Now, will it try to gulp this phase of the bull market down its throat in the coming weeks? Maybe, but in my opinion it would be healthier to have a pullback first. But… FOMO. MOMO. Animal spirits.

Oh, and earnings season, which we project to be positive.

• Traders take their trading profits, and…
• L/T holders be prepared to buy hard corrections/bear phases, or to alter our macro view (not expected any time soon)…
• Or a combination of the above. Why not be a hybrid trader and holder of core positioning?

Or perhaps, have a little fun with a log scale monthly chart of HUI and follow the Pitchfork upward to 500 or a test of the all-time highs. HUI is not as overbought as two occasions during the 2001-2004 analog we are currently working with.

That was the last time the macro had this many of today’s elements in place:

• Gold stocks rising with the Gold/Silver ratio.
• USD bearish.
• Growing dis-inflationary signals.
• Gold’s real price, as measured vs. many other markets (incl. esp. S&P 500) rising.
• What’s missing? The HUI/Gold ratio has not yet validated the 2001-2004 analog.

But that would be a process; a process of bottoming/basing and when least expected (and almost nobody expects gold stocks to ever leverage gold positively again) just maybe we get a big time trade in the gold stock sector.

Most everything is in place fundamentally, including but not limited to the the elements of this chart.

Again, one important element continues to hold out. The “sector internal” view of HUI vs. Gold has not yet changed trend, so I am not yet proven in my “2001-2004 analog” thesis in that respect. The miners could be lagging and signaling an impending end to the rally or they could be preparing to out-perform in its final acts (for this bull phase, at least). I lean toward the latter; gold miner out-performance.

A bigger picture, monthly view.

With respect to gold’s extreme overbought status, but silver’s non-overbought and the miners’ briskly but not extremely overbought status, we can also consider that gold may take a break, flatten out, chop, grind and work off its excess in the coming months, including sometimes violent down moves.

However, this could come within a rotation to silver leadership. I am not a silver bull. I am a gold bull. But any positivity that may visit the macro in the coming weeks/months could boost silver relational to gold and allow commodities to finally gain a bid. This could work in conjunction with an ongoing BMR is stocks.

Gold stocks have been rallying for the right reasons, but could eventually transition from rallying for the those reasons (e.g. 2001-2003) to rallying for the wrong (or much less right) reasons (e.g. much of the 2004-2008 phase). But in the near-term we want to see the HUI/Gold ratio rise under a fundamentally sound backdrop, as it currently is.

Two Potential Game Plans

1. Gold stocks accelerate higher, toward and/or through the HUI 500 (+/-) target, the HUI/Gold ratio busts out to the upside and we have a grand conclusion to bull leg #5 at target or new highs prior to a large correction, or…
2. The play cools down, reverses and corrects hard at our current 375+ target (399).

#2 might build in more longevity. But we are in new territory so please consider the whole matter theoretical at this point, trying to refine favored views in a complex macro.

My Strategy?

I am not going to trade myself out of a bull market. Fear of correction is just that, “fear”, until it actually arrives. And arrive it will. But “it’s a bull market, you know”.

People need to know up front whether they are trading or holding (like Old Turkey). I am holding, as I am not heavily positioned and would like to become heavier on the next correction. I’ll consider hedging as needed, despite the challenges of getting the timing right.

For now I am interested in the Q1 reporting season, to see if it plays out per the Gold/Oil ratio chart we reviewed last week. So I’ll watch the HUI/Gold ratio closely for any signs of upturn. Also, the Silver/Gold ratio, which we noted last week could be a candidate for a hard reversal after the recent breakdown. Here is the chart from last week.

If silver takes up leadership the indication would be an inflationary macro, at least for a phase, and that is not the a good fundamental backdrop for gold mining. But remember that a majority of bugs are inflationistas, and they would likely be more bullish on gold stocks, not less, in the interim.

So I am watching both of these ratios for reversal to leadership, which could really propel a final act for this bull market leg. But it is also important to note that as they stand now (HUI/Gold ratio flat and Silver/Gold trending down), they are negative divergences for the precious metals complex as a whole.

When taking into account a once again frothy BPGDM (Gold Miners Bullish Percent Index) and the potential for a resumed relief rally in stocks, there is vulnerability in play here and now. The gold miners have done inversely well as the stock market puked.

So it will also be important to factor the near-term fate of stocks. If they resume the bear and the gold miners start reporting good earnings results, it’ll be rotation to this now (finally) unique sector. If stocks gain a foothold and make a strong BMR, the rotation could go the other way.

But currently gold mining macro fundamentals are ship shape and “it’s a bull market, you know.”

US Stock Market

Per the above, and given the current negative correlation between gold stocks and broad stocks, I’d expect gold miner upside to continue if SPX resumes its BMR. If, however, SPX fails and then the investing world is left wondering why the gold mining sector is improbably (to them) gaining fundamental basis, we could expect resumed upside in the miners.

We have, after all, called for and anticipated gold mining as a unique sector within the macro in order to be bullish, fundamentally. That is what they are now. “Unique” will cut both ways at any given time, but bigger picture it is bullish within a counter-cyclical macro.

As to SPX daily above, ‘4’ may have already ended with a new bear down leg unfolding. But support in the 5220 to 5250 range will decide that. As of last week’s close, SPX rests upon support.

NDX is weaker, struggling at equivalent support in the 18400 area.

My Strategy?

Frankly, those who speculate short would be reestablishing short positions on the rally to resistance per the SPX chart above. That is a short setup. But it would only be proven out with a loss of current support. I’ll continue to manage with cash and equivalents (and their income). Maybe look for some individual shorts if the market weakens further. Meanwhile, I am a better bull than bear for some reason. After selling the big SPY bounce I don’t feel pressure to do much of anything until further data points come in.

US Stock Market Sentiment

Here once again is the still extended state of over-bearish sentiment. Smart money indicators are still eating stocks and dumb ones are starting to bite. Overall, it remains contrary bullish.

As an illustration to points made above, check out gold and its high risk rating per Sentimentrader’s data. Of course, it’s been that way for months upon months. “It’s a bull market, you know” (but there is implied risk in play).

AAII are still heavily bearish. A contrary positive.

NAAIM have tanked their bullishness and are a bullish contrary indicator.

The Fear/Greed index (ref. NFTRH 856 for a breakdown of its seven components) is still in extreme territory and still a contrarian positive for the stock market.

Sentiment Bottom Line

It remains contrarian positive for the stock market rally. Let’s note that much like extreme over-bullish sentiment was a lousy timer to a market top, it could be a poor one now, acting as a stimulant to a rally. We’ve already had a rally after all, when the Trump orifice “match” met the sentiment “tinder box” on April 9th.

Global Stock Markets (and USD)

The world (ex-US) continues to laugh in the face of America’s “great again” jingle.

Much of that is because the world is, on balance, geared to a weaker US dollar, which is the parlor trick the US seems to want to play in order to give the “great again” illusion. So far, even that is not working.

Nominal World is, however, at a very tenuous point, technically. It has bounced hard back to the convergence of the broken uptrend channels lower bound, clear lateral resistance and the moving average convergence to boot. This is a short setup with handy stop loss above the 50 day average (blue), especially if you think the US dollar can gain a bid.

All it would likely take to crack the World would be an improbable rally by USD. Uncle Buck is oversold at support, after all.

That support is better viewed on the weekly chart, which is also oversold. But much like overbought does not need to = correction (hello gold), oversold does not need to = rally.

I am not going to consistently cover individual markets, although we do keep tabs on what the Canadian TSX-V is doing, for indications on the commodity/resources trades, not to mention smaller exploration stage mining ventures (and scams alike).

And sure enough, the ‘V’ is back above the 628 trigger zone to our 680 target. Lose that and it’s DE-fence! Take out the previous highs and it’s party on… Garth? Wayne? Anyone?

Commodities

Generally for commodities, watch the Silver/Gold ratio. If the SGR bottoms and turns up a positive tailwind for the broad commodity complex would be in place. Meanwhile, the complex is impaired as gold out-performs, as has been the case to this point. While we may project something like a silver reversal to leadership, the current state of the Gold/Silver ratio implies the opposite of what is good for commodity/resources areas and the inflation trades in general. In other words, silver has not taken over relative to gold until it takes over relative to gold!

Commodity Indexes/ETF: CRB, GNX and DBC are bouncing. CRB within a gentle uptrend, GNX within a gentle downtrend and DBC within a sideways trend. Differences are due to respective commodity mix.

Copper & Industrial Metals: The copper price has held long-term support at 4.30 and rebounded. It retains a bullish big picture structure. Copper miners are much weaker, but also hold support to a big picture bullish structure. In my opinion, all it would take is for silver to take over for its old man, gold, and lead. Copper miners would probably haul ass in such a situation. Technically I am watching resistance for COPX at 37.50 and FCX at 34 to 36. The GYX index is less bullish than copper, but also above long-term support.

Oil & Gas: We have noted the positive seasonals for O&G. The oil price is bouncing within its downtrend. Gas is pulling back (thus far to a higher low) within its 8+ month uptrend. Interesting. AR is held for Gas and XLE, XOM, CVX, etc. are on watch for the sector, as a moderate priority.

Uranium: The sector has bounced a bit. I had already added NXE and UEC for no technical reasons at all other than bombed out bottom feeds. CCJ was then added as well. The price of u3o8 has come down a long way, near but not to our downside target of 58 (current price 64). In adding a few positions, I’ve tried to jump the u3o8 price target. We shall see. The play has really taken a beating over the last year.

Rare Earth Elements/Materials: A very front an center commodity space, given the current geopolitical mess the world is mired in. China exerts much influence on Rare Earth prices and in a trade war, they hold that club. But non-Chinese MP (USA) and LYSDY (Aussie) are held for those very reasons. MP has been trending up since August and LYSDY finally got its ass in gear and broke out of its 2 year long base.

Palladium & Platinum: These two continue to flounder along the lows of extended bases. Indeed, if you have fundamental reasons for being bullish, these bases are technical buying opportunities here and now. The floundering lows are support.

Agricultural: I don’t want the Ag commodities. But I do keep an eye on the Fert/Potash plays. Here is IPI, which I hold (thanks to subscriber Aaron for the symbol). The others on watch are MOS and NTR, both of which could be bottoming, although IPI’s chart is the best looking in that regard.

Portfolio

Gold is long-term risk management & monetary value/stability in a balanced portfolio.

Taxable Account

In order of position size. Cash/equiv is extremely high, as it had been for all those months planning for a market top, and has been now that we have likely entered a bear market. Mainly gold miners now (plus MP, AR and a couple U stocks in the “resources” space). But on alert for BMR resumption and possible swing trades in regular stocks. Meanwhile, the plan for the likes of the miners and royalties here is to add on pullbacks.

Trading Account

No positions. I’d prefer to short individual stonks in this account. Will wait to see if the BMR looks to fail or regather itself. I got time.

Roth IRA (non-taxable, no contributions)

The chart is going sideways, which is better than down. I’d obviously like the break of consolidation to be up. What could drive that? A new surge in gold miners, as they take up leadership over gold. I’d want to be adding to existing positions if that prospect starts to look likely. What could break it down? A hard correction in the PM complex.

Meanwhile, the stock market needs to declare “BMR over!” or “BMR resuming”. If it’s the latter, some solid gains could be had in former darlings (CVNA and RDDT currently held). If it’s the former, cash will do the heavy lifting, but I’d also consider shorting indexes for swings (lower priority when cash is paying).

Cash and equivalents are 79%, plus T-bond spec IEF. Quality gold stocks are #1, along with silver. But there is some junior exploration stuff and the portfolio is prepared to add more bull stocks (profit already taken on ALAB, which is back on watch along with several others).

Cash & income-paying Equivalents are at levels that are right for me and my real-world situation. Your situation is different. Cash will be adjusted as needed.

Refer to the Trade Log under the NFTRH Premium menu at nftrh.com for trade info, if interested (not that you necessarily should be). Also, you can follow on X @NFTRHgt for notice of updates.

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Notes From the Rabbit Hole (NFTRH) is a weekly market report in which we provide analysis on financial markets.  We make every effort to provide accurate and high quality content, but this analysis ultimately represents our opinions and these opinions are provided without warranty or guarantee of any kind.  See full terms & conditions of service under the ‘About’ heading in the main menu.