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Gary Tanashian, Biiwii (13 clicks)
Newsletter provider, long/short equity, macro, gold
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There is no way to put lipstick on the pig that is the fact of HUI's failure below important support at the 475-500 zone. But the fact is that the HUI has benefited from a rising yield curve (panel 2) and a declining long term yield (panel 3, AKA our biggest picture of an ongoing deflationary need to correct or 'the Continuum', which is periodically met by policy makers' inflationary actions).

click to enlarge

Here are some other facts...

  • The RPG (real price of gold) benefits from economic contractions as gold outpaces base metals, crude oil, stock markets, etc.
  • The 30/2 year yield curve is in a big picture up-trend.
  • The gold miners logically declined as yields rose recently with short term yields rising faster than long term ones. This is a non favored condition for gold and the gold sector.
  • The yield curve remains in a consolidation (at worst) as of this writing, though it is potentially making an upward break of this consolidation (we'll have to wait it out and see). A rising spread is generally bullish for gold.
  • Strong up moves in the yield curve have signaled oncoming economic contraction or worse, broken systems.
  • The RPG, which benefits from economic contraction in turn benefits bottom line fundamentals in the gold mining sector.

If that is a break of the yield spread consolidation, HUI may well prove to be on a false technical breakdown. What we do know is that true believers (and holders) in this sector are long past hope with many so far underwater they have stopped looking at their accounts. Sentiment is epic bearish or even beyond that; it is mired in utter despair and hopelessness with many gurus playing smart guy now, having moved on to recommending other areas that are working, i.e. they are trend following.

For those of us that are bottom feeders and value seekers this is not easy, but it is why survival (i.e. risk management) is job #1. Because people who survive can take advantage of a situation where fundamentals (for quality operations only) are good and getting better with respect to the RPG and the big daddy macro indicators are at least at a point where they could begin the process of turning for the sector's better. The yield curve is now in a posture where it is a candidate for reversal, which is different than saying it is ready to reverse tomorrow.

Meanwhile, nominal HUI targets a measured 315. Those are the black and white technicals. But the macro is its own animal and it could obsolete that target at any point. And if the low 300's does come about and the macro stays on point, the opportunity is going to be epic.

But for now, ignominy is carrying the day and a process that is taking longer than I would have thought, is playing out on its own schedule. It's why we manage risk every step of the way.

I know the stuff I put up here can be really confusing on a quick look, but it is absolutely critical to have tools that work - no matter how weird - to keep you intact for the day that opportunity eventually does arrive. I am not making this stuff up; it is a visual representation of data reflecting real relationships that imply particular outcomes.

If the macro fundamentals change, I sure do not need to be harping on the gold sector's fundamental picture. But I don't care if I am the last guy in the room, I am not going to turn out the lights and leave as long as my signposts say 'epic contrarian opportunity up ahead'.

Source: Gold Stocks And Treasury Yield Relationships