Gary Tanashian | Mar 15, 2020 02:32AM ET
Below is a monthly chart of HUI telling some stories of the past.
See you after the chart for more thoughts.
Last year, I had a downside projection for HUI of a gap fill and support test at 170 to 180 coming off the summer rally. That did not come about as the ensuing inflation/reflation trade of Q4 2019 lifted all boats, Huey’s included. I had to announce I was wrong about that target. And I make no claim to be right about it now because I had for all intents and purposes, shelved it. Well sir, wrong again.
And I am happy to be wrong because all these months (years, actually) I never was nearly loaded with gold stocks. Since Q4 2008 I have hoped for another ‘slingshot’ opportunity like that. While that trade was wildly successful it came at the expense of weeks of pain as I bought the crash enthusiastically at HUI 250, only to end up buying again – while figuratively sucking my thumb – at 150, the ultimate bottom. This time I am more patient.
The end of an inflation trade pressures gold stocks because inflation bugs buy during inflationary touts and sell during climactic deflationary phases. But a funny thing happens during the latter. The fundamentals improve. These are beyond the scope of this article but we have kept a close watch on the improvement as the fundamentals pull back to end the week but are not nearly broken (with the stock prices and gold bug spirits).
COVID-19 hysteria helped put a dangerous hype bid in gold (along with an even more dangerous one in Treasury bonds) and we noted that as a vulnerability along with the Commitments of Traders (likely much improved after gold’s correction this week although you will not notice much in it was much improved even before the majority of this week’s horror show. Consider it repaired now, for all intents and purposes. It’s not a timer, but it is also no longer a risk indicator.
But I digress. The story of gold stocks is one of the fundamental improvements amid counter-cyclical economic activity and deflationary pressure. History (along with the HUI chart above) states clearly that as the fundamentals improve, the gold stocks get sold down. It’s just the way it works and you can’t fight City Hall (or an inflation-centric gold bug bent of puking). Also involved are forced liquidations and various other hangers-on who will be exhausted when they are exhausted and not any sooner.
I am looking forward to this opportunity, especially in gold stocks but also possibly in broad stocks (big time gorillas like Microsoft (NASDAQ:MSFT), Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) are now in the portfolios thanks to this correction). We’ll see on that, however. Today was likely just massive short covering. The gold stocks will seek out a bottom as will the stock market after these violent drops and bounces play out and firm support is found.
I do think that history, from the deflationary phases of 2001 and 2008 and to a minor extent 2016 that saw gold miner bottoms, to the inflationary phases of 2003-2008, 2010-2011 and to a minor extent 2016 that saw gold miner tops is a good guide in the current situation. You buy the deflationary washouts and sell (or avoid buying as a longer-term holder) the inflationary touts. Now it’s all about patience and timing.
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