Gold News

How to Play Gold Miner Stocks

Gold miners require a unique macro backdrop...
 
WHEN gold stock bulls complain about a "smack down", a "hit" or a "smash" against the poor gold stock sector, what they should be thinking about is what a relatively small market the gold stock universe is, writes Gary Tanashian in his Notes from the Rabbit Hole.
 
Compared the multitude of galaxies populated by cyclical and risk on stocks and commodities and the massive bond market. The gold stock sector's noise to trading volume ratio must be far and away the biggest bull market on the planet (I know because I am part of it).
 
And once in a while the sector actually warrants all that noise. Like in 2001 when markets were beginning a bear phase and economies were faltering. Like in Q4, 2008 when gold stocks were crashing to unwind previous inflationary excesses, leading stocks and commodities into a terrible crash and rebounding first. Like in March of 2020 when the miners crashed and 'V' bottomed to lead what is to this day an ongoing economic recovery born of the inflation that gold and gold stocks first sniffed out.
 
And that is the rub. Personally, I have been favoring the prospect of a strong bull market in rhe HUI gold mining stock index (target: 500) after initially projecting an A-B-C upside correction target of 375 in 2019, which we put in the books at 373.85 last August.
 
But in order to continue favoring an ongoing bull market scenario the macro fundamentals must play ball; and play ball they have not since last summer. Hence, the A-B-C upward correction and ongoing bear market scenario gains strength with each passing month of positive economic activity, regardless of the inflation it was created with.
 
 
Enter once again the Macrocosm, because it is time for a reminder to myself if not you that in order for the gold stock sector to be anything special, the macro must rotate negative.
 
Speaking of rotation, it has been rotating alright, but with yields and inflation signals fading that rotation is not into a deflationary situation that would produce a big gold stock buying opportunity but is instead something of an interim Goldilocks scenario (easing inflation expectations, firming USD, Tech and Growth bid up, etc. while the economy remains okay).
 
To be a gold stock bull you do not want Goldilocks, you do not want runaway inflation hysterics paired with a growing economy (cyclical inflation) and you do not care about China/India "love trade" promotions.
 
You take interest at the prospect of Stagflation (inflation with faltering economic activity) and you take more interest if gold out-performs major currencies, the yield curve steepens, and gold starts out-performing cyclical commodities.
 
Then you really get the bull inspiration going if economies start to falter, confidence declines and market signals start flipping risk 'off'.
 
 
On balance, none of that is happening now. Hence, the cheerleaders should be avoided. They cheer. That is what they do. It's their job and they do it well. Avoid them.
 
As for the market's current rotation, it has been an at least interim move back into big Tech, into Growth and away from the reflation trades of late.
 
That was foretold well ahead of time by the 30yr yield as it was due for a cool down when it hit 2.5%. Ah, but the right side shoulder under construction could vanquish Goldilocks if it resolves bullish as currently expected and the inflation trades come back on.
 
But referring to our handy Macrocosm graphic, that may get inflationist gold bugs frothed up again but it would still NOT be a favorable macro condition. Not until and unless the inflation morphs to Stagflation and then at least, we're in new territory for the miners as gold could conceivably out-perform stocks and commodities as the Stag grinds away at economic activity.
 
There is a reason that gold stocks only rarely bull for real, and when they bull for real they really bull. Bounces and rallies will come and go (I think there is a decent prospect for an oversold bounce coming soon), but to lock and load a real opportunity the rare case of positive fundamentals while the sector gets sold down must be engaged.
 
Since last summer it has not been the time because cyclical inflation has driven gold (the miners' product) down in relation to cost input commodities, materials and resources. That is what I call a sector fundamental and it is poor.
 
Gold has also been driven down in relation to risk 'on' asset markets. This I call a macro or psychological fundamental. Rather than falling for the bitching and moaning out there about how evil entities are manipulating gold and its miners, how about simply respecting the truth of the market chart?
 
That truth states that gold is trending down with few signs of a bottom as yet in relation to a world of cyclical and risk 'on' markets.
 
As for the two largest planets of the Macrocosm, the economy is still growing and risk remains 'on' per this spread between quality (7-10 yr Treasury) and Junk (HYG) bonds. Those are facts. You can chase conspiracies all over the place, but they are facts nonetheless.
 
The macro is not yet aligned positive for gold or especially, gold mining. That could change at any time, but as yet it has not changed. That's another fact.

Gary Tanashian successfully owned and operated a progressive medical component manufacturing company for 21 years, through various economic cycles. This experience gave Gary an understanding of and appreciation for global macroeconomics as it relates to individual markets and sectors. Along the way, Gary developed an almost geek-like interest in technical analysis (TA), to add to a long-time interest in human psychology. Various unique macro market ratio indicators were also added to the mix, with the result being a financial market newsletter, Notes From the Rabbit Hole (NFTRH) that combines these attributes.

See the full archive of Gary Tanashian.

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