Party on, if you will, but the gold mining fundamental case is not complete.
On October 14th, we reviewed why a post-bubble contraction would be the proper time to buy gold mining stocks for fundamental reasons (even as they might drop despite improving fundamentals).
On October 28th, we noted that the fundamental case has not engaged, not quite yet. We also noted big-picture technical support parameters that need to hold for the play to avoid breaking down.
But on Friday morning, November 4th, after yet another strong US payrolls report, the situation has not only not improved, it has backed off by some measures if you are a gold-stock bull in waiting.
Sure, as I write the ARCA Gold BUGS index is rallying along with the inflation-sensitive cyclical stuff .
The nature (duration, fundamental underpinning, sentiment, and technical) of Friday’s broad market relief rally will have to be analyzed and updated moving forward. But it is in keeping with a bullish theme we’d developed well ahead of time.
But let's look at gold stocks, through the (NYSE:GLD). They would not participate in such a party atmosphere in any way other than market relief due to oversold technical conditions and, of course, over-bearish sentiment. But let me assure you that as of the time of writing, the macro fundamentals are not yet part of the rationale for a rally.
While there are several more important indicators to watch, below are some pictures of gold relative to more inflation-sensitive, risk ‘on,’ and cyclical markets. They indicate an incomplete process and beg a view that players can ‘play’ with gold stocks as they will, but the gold miners are not at all unique on the macro, which would need to see a real economic contraction for the best fundamental view (fading cyclical indicators with a softening Fed in the background) to engage.
Let’s review some gold ratios using related ETFs. These charts were created on Friday morning as a broad relief rally was in progress. So bear in mind these are not pictures of a weekly close. They are pictures of market relief of yet-to-be-determined length or intensity.
First, the not-so-bad (for gold stock macro funda), as GLD/SPY bounces in an attempt to reclaim the moving averages and its uptrend. I believe the risk is weighted toward stocks vs. gold, but the ratio must reclaim its uptrend to back that.
GLD/ACWX (world stocks) is declining within its intact uptrend. Again, not bad. As a side note, ACWX/SPY is bouncing hard and this could also factor into the global macro view of the next few months. A weakening US dollar would probably help here as the strong USD has impaired a large part of the financial globe.
GLD/{14178|DBC}} (commodities) shows one important measure of gold’s ‘real’ price maintaining its downtrend. Commodities are cyclical and inflation sensitive. Period. There is no post-bubble contraction until ratios like this say there is. As a side note, nominal DBC is busting bullish from a pattern we have been tracking. Commodities look better than stocks at this time.
GLD/USO (U.S. oil) is not at all constructive yet for the gold mining industry. Nominal oil is also busting bullish out of a daily pattern. Oil is a major gold mining cost driver. Do the math.
GLD/CPER (copper index fund) is dive bombing to test the uptrending SMA 200. It’s unbroken, but this measure of an oncoming economic contraction and inflation fade is taking a short-term hit. It’s classic, stodgy old monetary man gold vs. the economic Doctor Copper. Gold soon needs to find a bottom related to copper or else anti-inflation, anti-cyclical forces would be in trouble (as would market bears).
Speaking of inflation, GLD/RINF (inflation expectation ETF) continues to trend down but is on a bounce. This bounce in the monetary metal vs. a rough gauge of inflation expectations would need to keep on going and take out the early October high in order to mean much for the forces of the counter-cycle and liquidity contraction.
Finally, GLD/SLV (silver trust) shows the old monetary man vs. his more inflation sensitive, industrially utilized little bro, silver. It’s looking like a breakdown, which ironically is a positive internal indicator for the precious metals sector (both metals are rising with silver showing relative strength) as well as many other markets, but in its pro-inflation, pro-cyclical signaling also would indicate negative gold mining fundamentals if it breaks down.