What If Crude Oil Breaks Out (And Its Implications)

At the moment, crude oil seems to be acting as a free agent instead of in concert with the commodity complex that would play a role in signaling the effects (or lack thereof) of the inflation to date. The target off this formation, if it holds, is 110 or so. But as noted in a previous post, a drive toward 110 would load a significantly higher target, which we have been charting in NFTRH over the last several weeks by monthly chart.

As the gold mining sector grinds around with gold and silver flashing a contrarian green light (based on sentiment and CoT structures) but technicals on short term caution signals, people should note that a strong rise by oil would not be good for the mining sector. No ifs, ands or buts unless the metals somehow manage to out-perform oil.

Could oil be part of what the gold stock sector is pricing in? Is it priced in already? We have had HUI in ‘high risk’ mode since critical support at 460 was lost late last year. The current technical situation in oil does not help in the risk reduction department, as energy consumption is obviously a primary cost driver for the sector.

Yet on the big picture, we remain in an age of economic contraction as the Gold-CCI ratio has been clearly stair-stepping higher since the first outwardly recognized liquidity crisis in 2008. This means that my personal biggest picture macro plan remains on track and a ‘buy’ by this chart.

How to define ‘buy’? At this point, and considering the chart of crude oil above, that does not mean gold mining, which has not yet proven anything about a bottom, technically. Until it does, it is considered a push out to the future.

If the current bottom attempt by HUI fails (a potential bottoming pattern has not yet failed), the next targets are uncomfortably lower and brutally lower, respectively. As has been the case since November, the sector should prove itself to investors, not the other way around. I will be more than happy to be bullish without the risk management when more than one (in this case, sentiment/CoT) data point indicates as much.

Other definitions of ‘buy’ per the Gold-CCI chart? We should buy persistent economic contraction, no matter how many kitchen sinks policy makers throw at the situation. We might buy deflation. We might buy deflationary liquidation followed by inflationary effects (rising prices). We might strongly consider buying cash, at least until it is time to deploy said cash. Most of all we should buy risk, as in ‘risk not only abounds, but has been baked in by irresponsible policy maker actions seeking to leverage unpayable debt into asset market price appreciation'.

For a long while in my newsletter I have been writing that if the Gold-CCI ratio above – with its implications of economic contraction – breaks down, then our biggest picture and secular macro economic picture breaks down; i.e. policy makers win. But here’s the thing… it has not broken down and thus they have not won out over the natural economy.