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As the HUI
index of premier gold miners continues to chop and grind its way through
ongoing correction, the idea for those who understand that this unique sector
of the stock market stands to gain during phases of economic contraction, is
to survive. The idea is to remain strong (and by strong I mean have cash to
exploit the intensifying value proposition) and be ready for opportunity,
which is likely to present itself to nearly the extreme witnessed in Q4,
2008.
Now, I don't
expect nominal HUI to decline to anywhere near the 150 level that was so
compelling a buy in 2008, when quality explorers were selling for net cash,
gold in ground for free. But as the index grinds around looking for a bottom,
whether it be in the ongoing consolidation or a
final washout, the opportunity should be in the same 'no brainer' territory
as it was in '08.
We are
looking for 'higher lows' in 'value' indicators like the HUI-Au ratio. Some
individual explorers are actually starting to approach the 'selling for cash,
gold given away free' level. In 2008, the idea was to buy with a thought like
'this is either an epic opportunity, the whole investing world is ending or I
maybe I am just crazy'. Thankfully, the first option proved out.
The 2008
meltdown happened relatively quickly, as it was triggered by a deflationary
impulse that resulted from a meltdown of the US financial system. As I used
to write at the time, the gold miners were fundamentally vulnerable then
because their product, gold, had been in under performance mode for an
extended period due to the upward price pressures on commodities, goods and
services (many of which negatively impacted gold miner bottom lines) that
resulted from the previous, Greenspan sponsored inflationary regime (and
resulting inflationary growth cycle).
Now? Not so
much. And yet still we have a value buying opportunity shaping up amid a
still generally favorable fundamental economic backdrop as gold remains in out performance mode over the intermediate term (2012's
Goldilocks recovery notwithstanding). Spend some time reviewing this chart
and meet me below...
Here we have
various ratios that help indicate the 'real' price of gold. These are
measures of the monetary metal in various things that are positively
correlated to economies; crude oil, stock market, copper and broad
commodities served two ways, the CCI and CRB indexes, which are weighted
differently. This chart is vital to the NFTRH (and thus, my)
fundamental view that gold stocks can only be defined as investment worthy
and unique in phases of economic contraction.
The red boxes
show how poorly gold performed in relation to these other markets during the
multi-year run up to Armageddon '08 and HUI's subsequent crash. Then, as the
system belched up all the previous inflationary excesses and prices of
everything the previous inflationary regime had created crashed, gold's ratio
to these things exploded impulsively higher. Enter the kickoff to a new phase
of a rising 'real' price of gold and thus, rising gold mining fundamentals.
Ah, but the
chart shows an intermediate correction now in force since the 'real' price
hit 'blue sky' last summer during the Euro crisis. I began warning
of unsustainable momentum in real time and indeed the gold sector has
been in a post crisis consolidation to the current day. I reiterate for oh,
maybe the 10,000th time that you do not buy the euphoria in the gold
sector. You buy the washouts, the agony and the bile.
So, while the
current environment is no fun, especially with the up and down volatility,
the chart above paints the case for gold and especially quality (and there is
a lot of garbage out there folks, you need to be selective) gold stocks as
being in an intermediate (post Euro hysteria) term correction within a
still-bullish structure.
Some people
do not want to hear bullish talk at a time like this, just as they do not
want to hear 'gold bashing' at a time like last August. But it is appropriate
to become bearish or bullish during the extended phases when risk vs. reward
is in the process of coming in line. It is now in line for a bullish stance.
Last summer, it was the opposite and guarded stance at least was warranted.
Being in line with 'risk vs. reward' does not mean go all in; at least not
for me or my newsletter. It simply means be aware that the herds are in the
process of realigning to provide opportunity.
Now, if Team
Bernanke really is smart enough to keep up the current inflation regime while
manipulating Treasury yield curves to paint a serene and economically
friendly picture, then maybe it will be time to take the blue pill and sleep
soundly. But the indicators of gold's real price above are not broken. Any
decent chartist will look at the above and think 'consolidation'.
From this
consolidation comes what?... Anyone? Anyone? Beuller? Anyone? A consolidation is a pause before a move
higher. The current angst among the gold 'community' (a terrible term that
sets its members up as foot soldiers in a bloody battle) is understandable
for players who have been 'all in' since the acute phase of the Euro crisis.
I do not know
from what level the gold stock sector (using HUI as a somewhat ill-suited
proxy) will stage its comeback, but I do know that the fundamentals remain
intact on the intermediate picture, an HUI-Gold ratio value point is
approaching and sentiment is bleak. NFTRH is on a 'week to week' watch to
keep a fine tune on the proceedings and the ongoing analysis (including
frequent email updates on both the gold sector and the general markets) has
done its best to keep its writer and subscribers on the big plays while
managing risk every step of the way in the effort to remain strong.
It does no
good after all to win a war but still be dead upon its conclusion. If the
analysis tells me this a war that will not be won, the adjustment will be
made. That is not the case, however. Not nearly. Right now the theme is
survival, as many of us that are bullish on gold look silly (or worse, look
like dinosaurs here in the newest New Economy). Extreme patience and a sober
attitude is required, but the rewards are going to
be great for people who make it through.
Join me and I
can promise you not riches resulting from easy 'set it and forget' or frantic
'bullish, no bearish, no bullish' type of analysis, but rather an ongoing and
tightly focused management style that will either bring us intact to the
point capitalizing or continue to keep us out of the worst of harm's way
until things do become actionable.
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