Postscript: After completing #886 I want to call your attention to the bond market segment and ask you to consider, but not (yet) over-react to a nasty echo from the 2011-2012 period when Goldilocks was kicked into gear and gold was kicked out of the party by Ben (Big Brain) Bernanke and his Operation Twist. Today’s situation is not the long-term structural thing it became back then, but it is an echo, and could be a viable part of our already in-place disinflationary/deflationary “interim” view. If it is at all confusing, don’t hesitate to pop me an email.
Precious Metals
I find I can get more said with more charts if I just wing it and start talking about them. So here is a vid discussing gold, silver and some of my core holdings. Daily chart TA:
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A few notes:
- When I say “I’m holding”, that means for now, unless the correction proves to be something more menacing.
- Again, I am hedged, but I am not going to willingly ride a correction to the deeper levels noted in the video (very generally to the 200 day averages on the sector and stocks).
- What I could do is increase hedging to the point where I am seeking to profit, rather than protect. I’d also likely do some selling.
- In other words, if the unhealthy FOMOs who came in by way of the silver market are going to bring the thing down, I am going to put my purist notions aside and play it.
- When a primary gold stock correction takes hold, even in a bull market, it is often a thing to behold with the final low always seeming to be lower than you think. That’s experience talking.
- Q4, 2008 was an epic time to be buying. I did not short on the way down. But I bought the lows after buying the not-quite lows. This time I want to be more of a speculator, again, IF the correction turns into something virulent.
- If not, it’s why I have my core positions. If next week brings a positive reversal of fortunes, post-FOMC and handily, amid miners’ earnings season, I’ll go the other way. The bull way.
- For now, it’s the market’s move and I don’t trust the quality of sector sponsorship after all that time bulling with silver leading gold.
Silver is of course, still in its downtrend relative to gold. This has been our primary indicator of risk as it has spiked within its downtrend, just as it was an indicator of bull to come when it plunged in the spring. Spikes tend to quickly follow extreme plunges in the Silver/Gold ratio.
Another sector “internal” are the ratios of the miners to the metals. For safety’s sake, we can understand that there is a good chance these indicators will register the 200 day averages before they bottom and start giving signs of the correction’s end. They’ve already done good work as the correction is quick and brutal so far.
HUI/Gold and HUI/SPX are bullish until proven otherwise. HGR looks like it’s going to test the base breakout (that’s the area of the 200 day average above at .1276). HUI/SPX is also still bullish. I am considering that stocks may follow gold/miners/silver into correction, thereby keeping these internals intact for the gold stock sector. I added volatility (UVXY) against stocks to test that out.
Let’s pay attention to HUI’s relationship to the Gold/Silver ratio (GSR), because it is a complex one. Sometimes the ratio and the index go the same way (what I view as righteous with the macro fundamentals), but usually they do not.
For example, the fundamentally righteous period from 2001-2003 saw gold rise relative to silver amid a disinflationary macro. Gold stocks rallied. But then they kept rallying as gold under-performed silver (Silver/Gold ratio rose) from 2004-2008. Silver’s leadership came with a big rise in cyclical commodities and asset markets. The resulting crash in HUI was earned. Don’t let ’em promote you otherwise.
The chart shows several periods of negative correlation, but we made a big deal about positive correlation between HUI and the GSR from 2023 until the Silver/Gold ratio (SGR) started to rise (GSR fall) this past spring (blue shaded area). That sprang rallies in many cyclical asset markets and the gold miners continued to bull and really took off, leading everybody to the upside.
If the Gold/Silver ratio bottoms and turns up, the miners will likely not benefit this time, and could be quite vulnerable, at least initially. It’s a matter of distortions and unhealthy perceptions built into the gold stock investor base. In other words, there were a lot of FOMOs, MOMOs, silver bugs, inflation bugs, geopolitical bugs and flat out day trader bugs in there. It’s not healthy.
Until proven otherwise, after the last half year of bulling along with the SGR, the gold stocks are vulnerable to a situation where the GSR may rise, and if USD goes along for the ride there would more negative potential.
Importantly, the 2004-2008 decline in the GSR made 100% sense with the crash of Q4, 2008. That was an era when gold under-performed not only silver, but also other commodities for much of that time. Meanwhile, with HUI rallying 340% or so, a bubble formed in gold stock valuations.
Here is the important part; this time the GSR has only been declining since the spring time. Not nearly enough time to have indicated serious excesses built into the gold mining sector. Hence, our view has been that a correction would come, it may or may not be severe, but it is not indicated to be a show stopper like the extended 2004-2008 phase. Not even in the same ballpark. But as you’ll see below, there is the potential for an echo of the post-2011 period. An echo, not a replay.
If the SGR were to hold here and resume its uptrend, gold stocks would likely do well, and head toward a future excess, fundamentally, as per 2004-2008. In short, for the very long-term health of the situation, a firm correction would be healthy from the standpoints of addressing momentum excess and eventually, fundamental degradation.
Considering that the SGR and gold/silver stocks have been leading the broad rally since the spring time, I don’t think that the damage – if the above correction thesis proves correct – would be confined to the precious metals. Commodities would get hit too.
Here let’s recall that the commodity view is expected to improve greatly in the trade warring and (big picture) inflationary macro. But we are still managing the “interim” disinflationary phase of the plan. The question is whether the GSR and USD will wreck many markets amid liquidity crises or perhaps stocks get off Scott free in a disinflationary ‘Goldilocks’ play.
That’s an obnoxious but necessary question.
U.S./Global Stock Markets & USD
This week at least, what’s good for the Precious Metals goose, is good for the stock market gander. Let’s try a video format here while your letter writer wings it and blabs about what he sees (and thinks). USD is included as well.
But first, I realized after producing the video that I forgot my friends in Europe! The German DAX is sliding along sideways maintaining its major uptrend, and frankly looks like a buy to me, all other things being equal.
The STOXX 600 has already broken out from a similar alignment. The conservative target here is 585. The possible target – if stock markets in general remain bullish, is a measurement from the crash low to the green support line. That would be around 656. Crazy, eh?
If that were to come about, it would also apply to the U.S., whose crash lows I’ve viewed as a future bear market objective. We need to stay open minded. There is crash talk all over the place, and central banks are, after all, dovish.
Here’s the video, covering other global markets.
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U.S. Market Internals & Sentiment
Leadership is fully intact to the bull case. Indeed, the already constructive NDX/SPX ratio recently broke out of the sideways trend (shaded) to the upside.
Meanwhile, Team D-FENCE tried and failed to gain a foothold. In plain English, a defensive sector failed to gain the upper hand on the broad market. Thereby holding a would-be bearish (risk-off) market signal in check.
VIX got hammered last week because of course it did. There remains a negative divergence for the stock market, however, as VIX maintains higher lows with the stock market well into new highs. Bears watching in the coming weeks or months.
Junk bond spreads ramped upward on the recent regional banking uproar. After the Fed papered the problem over things have settled down. We shall see if they continue to settle.
Here’s an old fashioned one. The SPX A/D line had been positively diverging SPX from the crash in the spring into September. SPX has caught up to its A/D line. No positive or negative divergence, FWIW.
Sentiment-wise, NAAIM lurched bullish on 10/22, even before the market popped higher.
However, AAII are still trying to be market contrarians, viewing casino patrons as over-bullish. AAII remains moderately over-bullish in its indications. But this fits with all the crash stuff I am seeing and hearing of late. That’s not a bearish sentiment situation. Again, we’re waiting for a potential moment when AAII can’t take it anymore and jerks in to a pronounced over-bullish status.
CNN’s Fear/Greed index is not in a market-topping situation, sentiment-wise. The market is starting to show some degradation in breadth (in tandem with the closing of the A/D divergence shown for SPX above). As usual, I’ll take exception with the volatility interpretation, as vol got hammered after the banking mess got swept up recently. Junk bond and safe haven demand readings are also debatable.
But the bottom line, sentiment-wise, is that there does not currently exist a notable condition for a market top.
U.S. Treasury Bonds & Market Implications (including gold)
The funding mechanism of the great stock miracle is debt. Debt is held in Bond by creditors (none bigger than the Federal Reserve). Bonds are on an interim rally, which we long ago projected. Last week I added some 3-7 year to my short-term holdings. Creeping up the curve a little.
But the play was originally viewed as temporary (interim), and it still is. As the economy erodes and the Fed eases dovish, it would be against declining inflation signals. Today, Goldilocks is getting bid. She is the economic condition where inflation is “not too hot, not too cold… but just right!” and this is where our happy stock market patrons tend to celebrate.
It also represents the potential* for more downside in Gold. Gentle disinflation that the masses interpret as positive is traditionally adversarial to gold. But again, if it plays out that way the decline in long-term yields is indicated to be temporary (though it could last many more months), as is the gold market correction.
* At this point I wish not to spur overreaction. This is a developing thesis. One which may not play out. But if it does, it holds the potential to send today’s over-confident bugs scattering. We must always be looking ahead of the herd and scouting potentials.
Bottom Line
Folks, in the segment above, I see potential for a Goldilocks party. Stocks up, bonds up, happiness up.
However, our plan includes that pleasant disinflationary phase morphing into something more of a crisis. Like a liquidity crisis, like a deflation scare. I don’t think a drop to the red moving averages is going to be all Rainbows and Unicorns. However, there is the potential that the gold and precious metals correction could turn out to be more extended and painful than would be desirable for a majority of bugs.
Back in 2011-2012 I clearly remember the prospect of bearish precious metals not even being considered possible by a majority. But with a big assist from Ben Bernanke’s Operation Twist (yield curve manipulation, announced in September, 2011), that is exactly what came about.
Again, with the new macro implied on the big picture by the chart above, I don’t equate 2012 to today. Yet, in the distance from the yield’s current level to a potential test of the moving averages, there is a lot of southerly real estate that could be covered.
It is possible that gold and silver would be seeing a deflation scare out ahead if they do indeed continue in correction. That would likely eventually catch the USS Good Ship Lollipop as well, as it did in Q4, 2008.
So we’ll keep a close eye on the 10-2yr yield curve, which is currently going sideways within its steepener.
If the steepener temporarily aborts, Goldilocks could remain prominent for a while. However, a failure of the first phase of the steepener could shake out as a new steepener, this time under deflationary pressure. It’s what happened in 2008.
That would bring a more widespread angst to the broad markets. Taking this theoretical exercise further, it would push out the next inflation phase to sometime after a deflationary event, with gold leading the way up and out of it, as usual.
Basically, the whole thing maybe shaking out to a 2008 blueprint, in slow motion. A difference for gold stocks being that any coming crash in cyclical markets would improve the gold miners’ already good fundamentals (let’s remember that the 2008 crash resolved the sector’s poor fundamentals).
Portfolio
Gold is and has been viewed as long-term risk management & monetary value/stability in a balanced portfolio. I have not changed my actual position in gold, just the way this blurb is worded.
Due to time constraint, I have not added notes this week.
Taxable Account
In order of position size. Note short hedge on miners and an indirect stock hedge via UVXY. If Goldilocks plays out this week, that hedge will be eliminated.
The taxable account carries high cash levels as long as cash and equivalents are paying out. This is considered a savings account of sorts, rather than a speculation or even investment vehicle. The goal is to speculate around the periphery. In another market phase (e.g. post-crash), the account may get much more in the game.
Trading Account
No positions.
Roth IRA (non-taxable, no contributions)
The chart has lower to go to test its uptrend channel. I am going to try not to allow that. It is at a short-term support shelf right now, and I’ll try to keep it that way.
Cash and equivalents are 75%. This includes the miner hedge, JDST and stock hedge, UVXY.
Cash & income-generating Equivalents are at levels that are right for me and my real-world situation. Your situation is different. Cash will be adjusted as needed.
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