All through the bear market hopeful rationalizations were served up for a bullish case on the gold miners. All through the bear market we warned people not to eat that rotten turkey!
China demand, the China and India “love trade”, cyclical inflation driving up the prices of commodities and resources and the classic… economic growth in the US will create cost-push inflation through wage increases with the smart money seeking inflation protection in gold. All of those and a veritable Turducken of mishmashed ingredients were served to gold bugs as a decidedly not delectable appetizer before the main course.
The sector will also be more appetizing to a much wider range of investors, now that their perceived sure things in the FAANGs and other momentum fueled, ‘can’t miss’ areas (like the Semi sector, which we warned on long ago: Semi Canary Still Chirping, But He’s Gonna Croak in 2018) are no longer working.
Sector fundamentals are represented by gold vs. commodities, and in particular vs. energy and materials. These are where gold mining can see improved margins as product is marked up in price in relation to costs.
Gold is currently bullish in all items below except for Palladium, which is being moved by its own discrete (i.e. non macro) supply/demand issues within the auto industry. Gold/Oil, Gold/Industrial Metals and Gold/Materials are on the signal gold bulls awaiting proper fundamentals would like to see. Gold/Silver is a macro indicator and tends to rise with market liquidity stress. A rising Gold/Silver ratio often pressures the miners too so again, patience; it’s a process.
Macro fundamentals are represented by gold vs. major stock markets (and currencies, sovereign bonds and junk bonds). Gold vs. stock markets popped, dropped from the 200 day average (SPX), tested the 50 day averages and popped again. This is a ‘so far so good’ macro fundamental signal. Never was the gold stock sector going to compete for casino patrons’ dollars while risk ‘off’ gold under performed major stock markets on the macro stage.
