Bullish on Gold, Bearish on Everything Else

Gary Tanashian submits: In light of fundamental changes in the bond market where the yield curve (TNX-IRX ratio) has finally turned up after three years locked in a down trend, one might watch for changes in asset markets that have been on auto-pilot during that same stretch.

We are of course talking about the stock market, commodities and even 'counter cyclical' gold which got caught up in the hysteria. If you believe, as I do, that a rising yield curve signals that the bond market has done its job and withdrawn liquidity from the real economy (leaving the Yen Carry Trade, which is one sharp Yen rally away from unwinding - as the primary remaining liquidity spigot for the financial economy) then you might also agree that now is a time to remain cautious.

Risk management strategies should now be implemented. Greed should be under control. I favor the gold miners because gold is 'normally' counter cyclical and due to a bearish view of cyclical commodities which represent a substantial portion of the miners' cost inputs. In this regard there is reassurance that gold does not look as bearish as silver and the gold miners have not participated in the global stock market bubble currently taking place.

There is downside, but it could well be limited as a global asset correction takes shape and yet more fundamental dominoes fall in gold's favor. But as is usually the case, these events seem to happen in slow motion, thus obscuring the day to day view. Patience, a grounded game plan and of course charts are necessary going forward. I am mentally prepared for HUI 250, but hold core positions - guarded by USD (RYSBX, iShares Lehman 1-3 Year Treasury Bond ETF (SHY) and Cash) & Yen (FXY) hedges - into whatever is upcoming in the near term.

With macro fundamentals shifting into gold and its miners' favor, that seems like the prudent stance at this point because when they finally do turn 'n burn, there will be a lot of momo's trying to play catch up. Therefore, the caveat is that while gold and gold miners may have downside risk in the near term, the fundamental backdrop is coming around to a condition that normally favors this asset class.

Comments

[Ryan Wall:]

Why favor the miners which might find gold?

If gold if the way to go, why not buy actual gold?

2007 May 30 11:33 AM

[Gary Tanashian:]

I no longer mention it Ryan, but I used to write all the time that trading miners assumes you have already put your financial house in order, which I define primarily as owning gold & addressing debt. Re the miners, I am looking ahead to a time when their famous leverage to the POG comes back into play and for that to happen, we need a declining liquidity enviro, ie, gold up vs. the likes of oil & industrial commodities.

2007 May 30 01:18 PM

[ottorock:]

not a bad argument.......for a chartist :-)

Regarding the carry trade comment: the prophets of doom were out in force late Feb on this subject. But here we are in samo samo land. Why should any short-term Yen movement seriously affect the carry trade party, mister Tanashian? I'd say we're more likely to feel a blip and then carry on carrying.

2007 May 30 01:05 PM

[Gary Tanashian:]

Well this profit of doom is out now because the $ssec index has risen 60% since February and technically, stuff is breaking down (IMO) in anticipation of a Yen reversal off of major support. Okay Mr. Fundy guy? ;-)

2007 May 30 01:21 PM