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Northern Star: The Gold Stocks Beacon

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Published : June 12th, 2018
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Category : Gold and Silver

A negative divergence between gold and silver prices occurred in May 2011. Now, the opposite situation is in play; a positive divergence is occurring.

This is the daily gold chart.

Gold made a minor trend low at the start of May, and another one a few weeks later.

Silver also made a minor trend low in early May, but then diverged with gold. Silver began a making a series of higher highs and higher lows.

It’s true that intermediate trend rallies in precious metals tend to end with silver outperforming gold, but it’s also true that major trending moves tend to begin with the type of divergence that is happening now.

Inflationary pressures are building around the world. This type of situation is likely to be resolved not with lower fuel costs, but with higher wages.

Wage pressures are growing everywhere. Silver is like a blood hound, sniffing the catalysts of inflation before they move the prices of almost everything significantly higher.

This is the sugar chart. It looks very similar to silver.

When inflation began to show signs of appearing in the mid 1960s, sugar began to rise. It spiked dramatically in the early 1970s.

The rise in Chinese and Indian wages is the biggest inflationary catalyst in the world. It’s relentless and powered by a population of three billion people.

There are about eight times as many people in China and India as there are in the United States, and the GDP growth rates are vastly higher. India grows at 6% in a recession, while America grows at 3% in a boom. India is headed for 10% GDP growth, and wages and prices are going to rise in a similar way.

The income growth coming out of China and India is an inflationary tidal wave and global tariffs simply add gasoline to the fire.

What mainstream economists in the West don’t seem to understand is that US interest rates are far below rates in China and India. Powell’s rate hikes create short-term turmoil in emerging markets, but that’s just short-term noise in a big inflationary picture.

The United States needs vastly higher interest rates to stop the Chindian tidal wave and that is not going to be happening.

One of my subscribers notes that in Japan there are now more adult diapers sold than baby diapers. I expect the same thing to happen in America fairly quickly. By demographics definition, the US population is not ready for the inflationary freight train that is coming, and cannot get ready.

Sanctions are deflationary. Military spending is deflationary because it doesn’t boost money velocity the way money moving around in the global economy does. Peace in Korea will reduce military spending and the money will be used elsewhere.

North Korea is a small country, but Trump has already stated he wants Russia back in the G8. An end to sanctions in North Korea opens the door to ending them against Russia, and that opens the door to ending them against Iran.

The bottom line is that everything that is happening in the world right now, and I mean everything… is significant fuel for higher inflation that modest rate hikes in America are powerless to stop.

This is the Northern Star chart. For many years I’ve urged gold stock investors to get involved with the stocks in my vital “Thunder Down Under” Australian gold stocks portfolio.

Most of them are trading well above their 2016 highs, and many are above their 2011 highs. Investors who listened and took action have greatly prospered.

The good news: The gold bull era that is being created by income growth in China and India is going to make most of the precious metal mining stocks that trade on North American stock exchanges look just like Northern Star.

The overall technical picture for GDX and North American miners continues to get more positive by the day.

The entire $23 - $18 price range is a buy zone that will likely be looked back on as one of the greatest buying opportunities in the history of financial markets.

Regardless of the upside potential for inflation-oriented investments, gold and silver stock investors should be totally comfortable with the current price action. A Chindian income growth wind is gently blowing the sails of the Western gold community’s boats. Enjoy the breeze, because it’s not going away!

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form, giving clarity of each point and saving valuable reading time.
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