Gold Miners and Inflation

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A constant struggle in writing about the precious metals is in trying to be clear about the differences between the gold stock sector and other sectors when it comes to inflation. That is because there are two types of bullish environments for gold stocks…

  1. The ‘play’, where all the inflatables rise with inflation expectations; this would be the ‘gold is silver is copper is oil is hogs is corn’ trade. This is the play where the inflation and commodity gurus tell you to buy resources to protect yourself from the US dollar crash that is going to happen any day now. A problem is that in this environment many resources often out perform gold, thus hurting miners’ fundamentals.
  2. The other is a longer trade or dare I say it, investment. This is where commodity prices are declining and the USD is firm. Gold is stronger than silver and the inflation oriented gold bugs get bearish because they can’t understand how gold will not go down with oil and indeed, inflation expectations.

I have often called #1 a ‘SELL’ on any strong rally that results. #2 is a more difficult animal because it can be a grind as it sets up. That grind would be the misperceptions game kicking in where the majority gets fooled into thinking if copper goes down so will gold. After all, China’s gonna decelerate again!

tip.tlt.gdx

I often bitch about the short-term sentiment disturbances that geopolitics build in as the gold generals hump the troops and lather up just enough of them to fuel the next drop. So today was b/s, pure and simple. Gold stocks rising on strong GDP and Russia screwing around with Ukraine again. It’s not what we are looking for from a gold stock investment standpoint.

But look at the above chart, with the ‘inflation expectations’ meter TIP-TLT over the GDX gold miner ETF. The lead in to the 2008 liquidation was an inflationary ‘SELL’ and the 2011 commodity blow out (featuring silver’s epic flame out) led in to a massive bear market. Both times the gold miners had risen to their highs with inflation expectations (gauged by the elevated TIP-TLT) at extremes.

Today the TIP-TLT inflation barometer has declined to new lows and commodities have dropped hard while the gold miners have maintained a bottoming stance. The gold stock bears who send me emails every time HUI drops a few points should wonder why. The US dollar is at 52 week highs and yet the gold miners are well above their lows. And that is just the average gold miner; never mind the ‘quality leaders’ like the now richly valued Royal Gold and Franco Nevada that I personally traded out of the bottom.

So it is time to be looking for relative value among the actual miners and prospectors, and it is coming time to take advantage of the gold stock bears trumpeting that the USD is going to 85 (I think it’s got a good chance, after a breather perhaps) and the S&P 500 is going to the moon (target is 2192).

The gold stocks are likely to rally on the inflation trades that spring up and I am expecting one soon if the USD takes a break. But over time they are grinding out something more important, a potential bottom that is coming amidst a lack of inflation anxiety and at the height of economic prosperity. Sound familiar? It is the same dynamic that was in play in 2000 when the sector bottomed and the economy and stock markets topped. The US dollar was very strong then as well.

So while the sector will get played up and down (short-term downside targets remain open) I have not heard any credible arguments from gold stock bears as to why the sector is not bottoming. A real bottoming process is after all, an extended and even painful affair.

Precious metals bears put out easy analysis just like the bulls do. They are the other side of the coin, talking about no inflation and a strong USD as a reason that the sector is going to crash.

Add in the TA guys coming out of the woodwork seeing gold in a triangle breakdown and another plunge to come and you can see why I get frustrated on days like today, where geopolitical hysteria mucks up the works. It has nothing to do with anything. This is all about getting most people on the wrong side of things.

I would love to see one more drop that emboldens Team Gold Miner Bear because we have some minor downside targets that if registered with the right macro fundamentals shaping up, could be a final grind out before this trendless phase (that by the way is almost exactly the duration of the trendless topping phase of 2010/2011) is over.

On a bigger picture, nothing has changed with respect to the bottoming patterns we have been managing for nearly a year, other than the fact that every jockey with a chart sees them. But even there, some TA’s are now morphing what they see into continuation patterns in service to a coming bloody plunge.

That’s not bearish. It doesn’t mean it won’t happen but it does mean the odds are less with every bearish convert.

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