Think you know gold stocks?

Many gold stock traders will hold for the wrong reasons, sell for the wrong reasons and not buy back for the right reasons

It is one of the most exciting aspects of precious metals investing/trading. This buy/sell for the phenomenon of wrong motives. Many years ago I came up with the chart below to illustrate how advisors, analysts and their herds focus on the wrong reasons to be bullish on gold miners.

Re-enter, the one Macrocosmour rough guide to what is and isn’t so important to the fundamental case of gold mining. See those tiny planets (China/India love exchanges and above all, cyclical inflation)? They are small for a reason, and the reason is that they are at best inconsequential in terms of the supposed fundamentals.

What I call “cyclical inflation”, i.e. inflationary macro-management by monetary authorities that at least temporarily they work for the economy, and the China/India buying sprees have been ineffective themes at best and disastrous at worst for gold traders who believe in them since 2008.

As it has been worked for many years, it is countercyclicality and deflationary pressure that will determine the “real” price of gold (measured by commodities, stocks, CPI, etc.) has grown strongly, even though its nominal price remains secret. It will be the real monetary value asset, gold, that will retain value as its relative price becomes inflated in a macro crash.

This, in turn, will expand the margins of gold mining operations, all other things being equal. Gold/Energy, Gold/Materials, Gold/People etc. As gold’s ratios to other assets and markets expand, so does a gold miner’s bottom line potential.

For much of the last two decades, the aforementioned dynamic only came into play during bears and/or asset market crashes (eg 2000, 2008, 2020), before the deflationary situation was quickly eliminated by the likes of our political hero, around 2008. -2009…

It was truly heroic—even if it did long-term damage to the system—as the stock market bull market born of the political panic that began in 2008 endures to this day.

Do we currently have the proper fundamentals of gold mining? Well, the relationships between gold and cyclical markets grind pretty well. The monetary metal is in a firm uptrend against commodities, according to this weekly chart. This fuels what I call the fundamentals of the gold mining “sector”. However, there is vulnerability in gold stocks to a future broad bear market as there is no definitive trend change against the stock markets yet and miners are only among the leaders of a broader rally including many asset markets very speculative. . Gold miners are not unique yet.

And that’s okay, for now. But it is possible that there is a “SELL” call the sector to a much higher possible level than today. This will be due to market correlation and vulnerability. Recall that gold stock traders panic selling in droves, leading the market crash in 2008 because “inflation failed!!”, because “deflation!”, because “gold is falling!”

But in terms of cyclical and inflation-sensitive markets, gold rose higher during the last two deflationary episodes in 2008 and 2020. Those were buying times as mining stocks collapsed. You can bet the inflation-centric gold bugs were saved because… “OMG, no INFLATION!“

A future long-term bull market may result from the lack of future “failed” inflation runs (unlike the 2004-2022 period). But again, first comes the theme of “vulnerability” after any highs made on the current bull leg.

The “macro” fundamentals, which will sway mainstream investors when gold reasserts itself against the stock markets, are still ongoing, baking in the oven. The aforementioned “sector” fundamentals are doing quite well, as gold easily outperforms cyclical commodities, including factors driving up gold mining costs. Fundamentals are positive now and will improve after stocks (likely including gold mining stocks) sell off. Then comes the longer bull market, which could last the rest of the decade (only here.

The essence of our overall macro current theme is that the implications of a broken macro by 30-year Treasury yield (Continuum) long-term trend brokenis that our political heroes could and probably will try to restore the system effectively, but due to the saturation of the bond market (the Fed’s management/manipulation tool for decades), the results will not be the same happy ones as in previous episodes. . There is a rebellion by the holders of massive US debt and it will affect the ability of an all-powerful Fed to control things at will in future down cycles. This was the old way (it’s just my attempt to make a colorful point folks)…

… but ineffective battles against both deflation and inflation, a veritable pulling back of the curtain of invincibility, may be the new way.

As for the Continuum, the trend is broken, but “returns are now falling” you say? Yes, and right on schedule, according to our analysis of a disinflationary (gold rush) to deflationary macro swing that we have been managing for nearly 2 years. Implications of the Continuum trend break would come into play after this pullback to test the evolution of the breakout (targeting the 3.3% area).

So I’m talking about my book, and that book calls for this easing of inflationary pressures in the current phase, but also future policy constraints when it’s time for any political “hero” to take action against deflation.

For several reasons that are beyond the scope of this article, I expect a tragic end to the stock market arm of the “Everything Bubble” instigated by super-easy policy. Anything positively correlated with it is likely to be vulnerable when machines, quants and crowds of traders start selling in unison, just as they are buying in unison today. And don’t forget the man on the edge. He’ll want his deal and he won’t care what you have to liquidate to get it.

But overall, the much-maligned HUI/Gold ratio (HGR) was a fair indicator of a generally weak underlying gold mining fundamental. His 20-year decline made sense, and you shouldn’t let the bellyaches and excuses sway you otherwise. But so far, gold mining’s rally is valid through this important domestic indicator. I expect HGR to continue to lead in whatever chart is ahead. Longer term, after a deflationary liquidation wipes out macro, a new bull market may even emerge in this domestic indicator.

We are on the cusp of actually managing the 2020 crash, the inflationary recovery from that crash, and most recently managing the “new macro picture” and the current Goldilocks/disinflation situation within it. In fact, in the big picture, we have been in step with the markets analytically since the beginning, right in the jaws of the market crash in Q4, 2008.

It is important to note the above as this is not a perma bull (gold stock) you are reading. When the macro was bad, I called it bad. It’s no longer bad for the gold mining industry and it’s slowly but steadily improving.

One thing is certain. We need to manage modern markets with an independent mindset and not follow outdated and debunked theories about why the gold sector “should have been” bullish. The HUI/Gold ratio was not wrong. It was very fair. If your assumptions are wrong, then your entire analytical framework is built on error. The assumption that cyclical inflation would increase gold stocks has been a pervasive, destructive, and ongoing fallacy.

Conclusion

The current trade is already quite profitable, but when it ends, it will probably end in a rude way if current trends and market correlations remain intact. Then, amid deflationary fears over macro, the average gold trader won’t buy the destruction. But this will be the time to position ourselves for a long-term bull phase. It could be a few years away.

In the meantime, let’s enjoy the current trade but also understand it for what it is, a cyclical bull phase against improving fundamentals with a nagging problem, a currently positive correlation with high-risk cyclical markets (again, to talk about my book, I have several positions in those markets as well, as we manage the eventual end stages of the broad bull).