I'm of the opinion that there was a better than even chance of gold taking a correction after Washington finished its Kabuki dance on the debt deal. I have been wrong on that thus far, and maybe the dumb money that has piled in over the last month is not as dumb as I assume it is.
This money is coming in globally, as a simple look at gold's ratios to major currencies shows. This is not just a USD event. The world is losing confidence in the system. Gold does not have any more running room on the upside without making a channel buster move up.
Be that as it may, I was prepared for the last gold miner bull run out of June, and was prepared for this recent pullback as things got too hot. What I did not expect was today's show of strength amid markets that are losing support and looking downright scary. This seems like global panic. But it is not panic that makes gold mining fundamentals. It is bottom line operating costs as they relate to the product, gold.
Among many other things, the Au-CCI (equally weighted commodities) ratio does a good job of tracking this ratio, or the real price of gold. I cannot give away my keys to the kingdom, so I am going to simply put up the chart and let you reflect on the real price of gold (top panel) vs. HUI (lower panel) in the interest of perspective.
[Click to enlarge]
There is a lot of complaining about gold stock under performance vs. the metal. This is generally bogus, but it does what it is supposed to do and gets impatient people fed up. Just as a declining real price of gold drags unfavorably on gold mining bottom lines (rising energy and materials costs), so too does a rising one help bottom line operational metrics (declining costs vs. the product, gold). And yes, this applies even after factoring in the notion that gold mining companies can be some of the most poorly run companies on the planet, with a fair amount of incompetence and a lot of antagonism toward investors through stock dilution and the like.
The markets are fun again now that we got tje debt debate behind us. Things could be worse. The remainder of 2011 and 2012 promise to be very interesting.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: No stocks mentioned, long the gold sector. Long cash.
