HUI Technical Status and Gold Stock Fundamentals
A review of the gold inventory situation
It was essentially a year ago that Warren Buffett untimely entered the gold stocks sector, unwittingly calling a post-crash rally top and signaling the start of 2020 inflation trading, which did not include gold stocks (for logical reasons, as explained in NFTRH and on NFTRH.com over the years). Last summer, the usual golden perma-bull suspects came out immediately after with screaming megaphones as we noted in Real Time on August 17, 2020: Buffett buys a stock of gold!
As part of the overall correction, as bids shifted away from precious metals and, to a lesser extent, growth/tech stocks towards value stocks and cyclicals (including commodities), inflation-driven reflation trades gained momentum and gold stocks were sent into a long decline. Again, if you strip out the perma-touts and think rationally, the miners were just doing what they should do (see below).
There were two false breakdowns, the second of which sparked a strong rally. We also surprised Mr. Buffett for a contrary signal at this rally on February 17, 2021: Buffett pukes a stock of gold!
The rally ended at a key resistance level (as plotted well in advance as a cautionary zone in NFTRH) and here we are with HUI below its falling SMA 50 and SMA 200 (which were expected to hold as support in order to maintain a constructive view), back into the downtrend channel (actually the handle of a still bullish overview, which is beyond the scope of this article) and the short-term bounce I waited for finally arrived after the abrupt interruption of an unexpected low.
This bottom is the result of positive RSI and MACD divergences and here we are bouncing back with the upper channel line, descending sloping moving averages and a clear sideways resistance zone all taunting… “’Come on Huey, we to dare you!”
HUI chart from a list of charts in my stockcharts.com account.
The reason I’m watching gold stocks closely isn’t due to a masochistic trend, but rather the need for balance in a leveraged macro (for some compelling charts and data, see this article highlighting macro views of Crescat Capital). When the macro crashes, there will be a loss of liquidity and terrible stress on the bloated financial system and the economy it pumps. This would be the counter-cyclicality that gold is made for. By extension, miners would benefit from this counter-cyclicality, fundamentally.
I’m not your average gold bug (those who know me have heard them thinking aloud in unison “yeah, we know”) and NFTRH is no gold bug rag; it is a complete financial market manager. When I hear about inflation, I think long and hard about gold diggers, and not in a positive way. My thesis boils down to this; if gold stocks are going to rally during an overtly inflationary phase, they will likely do so as part of a bubble, similar to the 2003-2008 period where all kinds of commodities, including commodities and mining cost materials , outperformed the miners’, gold, yet the HUI rebounded over 300% due to intense overvaluation.
Enter again, the Macrocosm.
The ‘Macrocosm’ graphic is my markup of a work located on Wiki and shared by Creative Commons.
With positive play for gold (not necessarily miners) while Treasury yields remain below the rate of inflation (i.e. real yields are negative), let’s review the still poor sector and the macro-fundamental context for gold miners. By “industry” fundamentals, I mean directly affecting the execution of gold mining bottom lines. By “macro” fundamental, I mean a macro signal that affects investors’ perception of gold stocks.
Status of the macrocosm by the size (importance) of the planets
- Jupiter: The economy is firm, albeit inflationary, and public confidence intact (macro negative).
- Saturn: Risk indicators such as credit spreads (junk to Treasury) have the potential to backfire here and should be watched closely (neutral macro).
- Neptune: Gold/commodities: still under pressure (macro & sector negative, see below).
- Uranus: Flattening of yield curves since March (negative macro, but awaiting change).
- Earth: Gold is at least constructive to rally against a basket of global currencies (neutral macro with a bullish bias).
- Venus: Stagflation is not yet indicated because a majority still considers inflation concocted by the Fed and served by the government as the “right” type of inflation. When he turns into a deer, the story will be different and probably positive for gold and miners.
- Mercury and Mars: A “ha ha ha” knee snap is the appropriate response when someone suggests you buy gold stocks because of inflationary (cyclical) economic growth or even more ridiculously, because of the demand for “love trading” from China and India.
Here are some charts showing the state of gold ratios in positively correlated markets. A change can happen at any time, but as you will see, said change has not yet happened and no amount of encouragement or dispensation of dogma will change that.
All charts below are from a list of charts in my stockcharts.com account.
Gold/CRB (negative macro & sector).
Gold/Oil (negative sector, as oil/energy is the top mining cost)
Gold/Materials (negative sector)
Gold/Industrial Metals (negative macro and to the extent these metals are used in construction/mining, sector to a lesser extent)
Gold/SPX (negative macro)
Gold/Global Equities (negative macro)
Important: The macro will run.
Also important: the macro has not yet run.
Of utmost importance: patience, perspective and the ability to think for yourself, not to be fed what you think by supposed experts.