As you know, I have made a big deal about the positive macro backing a bullish view on gold stocks over much of the last year. That is well and good. But nothing lasts forever, and so I want to stop the bull bus for a minute and talk about something that could come into play that would be fundamentally corrosive, even if the miners continue to rise.
As you know, I have made a big deal about the 2001-2004 analog, which was a blessedly positive albeit temporary environment when gold stocks went up for the right reasons, as the “real” price of gold (gold vs. cyclical, inflation sensitive and risk-on assets) was rising and the miners leveraged that out-performance.
This chart shows that phase along with the current phase that sees similar indications with the exception of the HUI/Gold ratio (thus far). That’s a pretty big exception.
If we are right about an inflation trade with silver taking up leadership from gold, we would then see a degradation of the macro-fundamentals for gold mining. For example, the Gold/Oil ratio would fall further, and compromise what I call a “sector” fundamental. So far, the pullback is normal.
If the cyclical world continues to catch a bid and the Gold/SPX ratio goes back to the hell it came from, what I call a “macro” or “psychological” fundamental would be ruined. As it stands, we have projected a pullback as far as the noted support area, so still normal to our expectations. This correction was in the cards.
Gold is still trending up vs. the cyclical world, despite the hard relative pullback in progress now.
HUI is doing as it should do and following its Gold/Inflation Expectations (RINF) funda nicely. No problem here, unless…
…unless the inflation trades are starting for real. If silver goes on a heater vs. gold. If copper breaks further bullish and starts to lead gold. Then the blessed fundamental picture would be halted and a new phase, one reminiscent of the 2004-2008 phase, when the miners rose significantly along with DEGRADING fundamentals, would be in play. The HUI/Gold ratio has remained mainly flat, after all.
Here is another chart, which advises us that the gold miner bull would much prefer a weakening (dovish) Fed. But if an inflation trade, complete with rising bond yields, picks up steam, the positive message of this chart would be done as well.
Again, let’s recall that HUI ground much higher against a failing HUI/Gold ratio from 2004 to the crash in 2008. So there is a case for the miners to resume bulling after this correction ends, if an inflation trade is in progress. Especially if silver takes up the baton. But I will keep an eye on and make due note of the situation as we move forward.
Gold stock prices may and probably would resume rising in such a case, but if it happens against degrading fundamentals, you will be the first to know about it (and keep hearing about it until the funda either improve or the sector realizes the risk like it finally did in 2008). Forewarned forearmed and all. It would be a return to the sector as not unique and thus, not a main focus.
Meanwhile, nothing has changed other than the odds of an inflation trade, which may only be minor and may not break the gold mining fundamentals, which are only in consolidation, thus far.
Please let me know if you have any questions. You can comment here or pop me an email.
