Gold Mining Sector Outperforms as Inflation Signals Fade
Gary Tanashian | Dec 09, 2022 02:50PM ET
If you have tuned out inflationist gold bugs since mid-2020 you are now in position to capitalize, unlike scores of inflation bugs who’d already bought (and likely sold into tax loss season, 2022).
My reader have seen this space write many times how gold is not about inflation. At least not primarily. That compounds with the gold miners (GDX), which leverage gold’s standing within the inflated (and periodically deflated) macro. The gold mining sector is not about inflation. As in 2003-2008 the gold miners can rise during an inflationary phase, but as in Q4, 2008 they would then be summarily executed due to poor accumulated fundamentals.
The correction in the gold mining sector from mid-2020 into Q4 of this year was entirely normal to this analysis. What is (or should be) abnormal is excuse making and ghost stories about conspiracy and manipulation to explain why gold miners did so poorly. As you probably know, there is a lot of that out there. It’s tradition in the precious metals complex.
But again, the gold miners leverage gold’s relationships with the greater macro and during an inflation cycle like the one we just had, gold was an also-ran just as it should have been. That made gold mining a compromised business as cost input commodities (e.g. oil and let’s not forget human resources and materials) out-performed the gold mining product.
Therefore, in order to gain insight into the proper backdrop for the gold mining sector, I usually compare gold’s status to that of other markets. But this week, using the respective ETFs, let’s take a checkup on the gold mining sector’s progress vs. cyclical and inflation-sensitive markets, which would validate the relational gold analysis by showing the miners’ relative performance.
GDX/SPDR S&P 500 (NYSE:SPY) shows an attempted trend change after bottoming over 3 months ago and establishing an intermediate uptrend. Taking out the SMA 200, as it is trying to do now, would be an important step to changing the major trend in GDX/SPY.
GDX/ACXW shows a slightly lesser attempt. Global stock markets have been strong relative to the US for over a month as the US dollar has been in correction.
Get The News You Want
GDX/Invesco DB Commodity Index Tracking Fund (NYSE:DBC) is nearly 1.5 months into a strong rally. Again, it’s a nice validation of one of most important rules we follow in NFTRH, which is that you don’t buy gold mining stocks in any way other than as a trader during inflation but you do buy during dis/deflation, especially if the miners are in correction due to deflation fears (babies out with the inflationary bathwater).
GDX/United States Oil Fund (NYSE:USO) shows the miners vs. one of their primary cost inputs, crude oil. The United States Oil Fund may not be 100% accurate as a marker but it sure is close enough, and it is another that validates our view (and invalidates the ‘buy gold, copper, oil, hogs, etc. for inflation’ brigade.
GDX/Global X Copper Miners ETF (NYSE:COPX) shows an incomplete aspect of the fundamental picture. As other commodities fall by the wayside copper and its industrial metals bros are hanging tough as China reopening hype envelopes the land. Copper is bouncing within a downtrend and it’s the season of good cheer and relief by the punch bowl. It’s not going to last. But for now, it’s a holdout among gold mining ratios to other markets.
Finally, let’s have a look at GDX/ProShares Inflation Expectations ETF (NYSE:RINF) for a view of the gold miners in relation to one rough measure of inflation expectations. This chart unsurprisingly shows that gold stocks bottomed in relation to this inflation gauge at the same time nominal RINF topped out. Again, not surprising. But it’s making some progress and as we’ve been noting in NFTRH for months now, changing the macro is likely to be a process, not an event. GDX/RINF is still trending down and nominal RINF is still in a series of higher highs and higher lows. In other words, an uptrend.
Much like gold’s process of taking eminence within the greater macro markets, the gold mining sector is also in the process of validating the NFTRH view for 2023, which is decidedly not inflationary with the main question being between disinflation and an outright deflation scare.
Such a backdrop will not be easy to manage, volatility-wise; especially with a majority of gold bugs still brainwashed about inflation. We will manage the process and progress every week. But any forward volatility aside, it will be the right backdrop for lock and load buying of quality gold mining stocks (I currently hold several as seasonal positions at least, and longer-term positions, at best).
As a side note, any given gold miner – especially those located in problematic regional/political situations – can have its own business execution problems at any given time. But generally, the sector (even if you simply buy GDX) should do well (we have our ultimate upside target for the HUI Gold Bugs index, which you may have already seen if you read this site regularly) and a selection of the best gold stocks (royalties included) should do very well in 2023.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.