I wrote the following commentary on the precious metals market for Kinesis Money:
With all of the factors in place to support a big move higher in the precious metals sector (raging inflation, escalating geopolitical tensions, recessionary economy, etc), the recent market action is frustrating to say the least. To be sure, a certain percentage of the poor performance in gold, silver and mining stocks is attributable to the ongoing decline in the general stock market. It’s a bear market.
When capital pulls out of the markets (stocks and bonds), it pulls out of everything. March 2008 to late October 2008 is a good parallel to the current market. At some point there will be a catalyst, or catalysts, which triggers a positive divergence of the precious sector from the rest of the stock market. The most likely event will be reversal by the Fed of its monetary policy.
That said, gold continues to move in a steady uptrend that extends back to March 2021:
There have been several successful tests of that uptrend/support line along way. Currently gold seems to be holding its 200 dma. While anything can happen over the short term (next couple of months), I expect a big move in the sector sometime between now and the end of October.
Also, keep in mind that the effort to prevent gold and silver from moving higher has been particularly aggressive since gold was turned back from $1975 in mid-April. But 85-90% of the time gold has been rising during the hours when the eastern hemisphere physical accumulators are trading and gets pushed lower once London and then NY open, which is primarily paper derivative gold trading. When gold shakes off the latest price control effort, it will shoot over $2000 and move higher from there. Similarly, silver is in a dog fight at $22. But once poor man’s gold prevails, it move higher toward $30 quickly.
The chart below shows the ratio of the S&P 500 to the Amex Gold Bugs Index (HUI) going back to 2001. I’m using the HUI instead of GDX because GDX did not exist until 2006. I wanted to take this chart back to the end of the 20-year bear market in gold that began in 1980.
The black line was drawn to show periods time when the mining stocks were incredibly cheap vs the rest of the stock market. The current relative value between the SPX and the mining stocks is back to where it was at the end of 2015 and the end of 2018. Big rallies in the sector followed. Prior to the end of 2015, the last time the mining stocks were as cheap vs the SPX as they are now was in late 2001. At that point, a 10-yr bull cycle – inside a longer secular bull market – was already under way.
Unless you believe that the secular bull market in the precious metals is ending, the chart above suggests that there is another substantial bull move coming. Obviously timing is unclear. What might be the catalyst?
The more I ponder the circumstances, the more I am convinced we’re watching the summer of 2008 repeat and unfold right now, only this time it will 10x worse than back then. First, the housing market is starting to head south quickly. In six to twelve months, most people will be shocked at how different the housing market looks like then compared to now.
Furthermore, the banks are in trouble. If you pull up a chart of Deutsche Bank, you’ll see that it is down nearly 50% since February 10th. DB is the most systemically dangerous bank in the world. Many of the other Too Big To Fail banks are down 25-35%. The Nasdaq, down 31% from its ATH in November 2021, is down less than the stocks of many of the worlds largest banks. We have no idea what their off-balance-sheet derivatives exposure looks like but I can guarantee it’s apocalyptic.
Finally, the stock market is in a crash cycle that is still in low gear. When the wheels were flying off the financial system and the economy in 2008, the Central Banks – led by the Fed – flooded the banking system with printed liquidity. They did the same in 2020, though the Fed began in September 2019. It is unknown is whether or not the Fed and other Central Banks will quadruple down on their money printing at some point or if they’ll let everything collapse this time. But in either scenario, at some point there will be a stampede into physical gold and silver that will translate into a large, sustained move higher in the mining stocks.
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The precious metals sector looks like it’s ready for a major move higher, especially the junior exploration stocks – you can learn about my Mining Stock Journal here: MSJ information; and my Short Seller Journal subscribers have made a small fortune on the ideas I present weekly in my short seller’s newsletter: SSJ information.
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