Inflation is Not The Best Backdrop For A Gold Sector 'Buy'

Sunday, February 25, 2018

inflation ahead

Gold Prices This Week and Next Week’s Outlook

Inflation is Not the Right fundamental backdrop for the gold sector.

Despite much analysis to the contrary, history shows that sure, gold stocks can rise during inflationary phases, but that sooner or later the eroding fundamentals of such a backdrop will catch up to the miners.

One example is the inflation-fueled bull market in precious metals, commodities and stocks that took place under Alan Greenspan’s oversight. Gold flat lined or gently declined in ratio to cost input commodities like mining materials and energy. The final highs in 2008 resolved into the H&S top that formed in 2007-2008 and a massive liquidation into Q4 2008, which proved an epic buying opportunity amid a pervasive deflationary backdrop.

A more recent example was as noted in this week’s NFTRH premium report (#488):

Since the beginning of the most recent inflation cycle, when gold and gold stocks bottomed and led the initial surge [in January 2016], the slow grind of increasing inflation expectations and inflationary signals in the economy has come with a long sideways grind in nominal GDX and a downward trend in GDX/SPY (see below).

Now look at the mid-2016 period. That was when we were going on an on about the erosion of gold’s fundamentals. https://nftrh.com/2016/05/30/amat-chirps-b2b-ramps-yellen-hawks-and-golds-fundamentals-erode/.

I realize that gold’s link with inflation is rooted in the mass psyche and it is true that gold benefits from inflation over the very long-term. But the gold sector, the miners of this long-term inflation, currency and monetary disaster hedge do not prosper fundamentally during risk ‘on’, pro-cyclical inflationary phases.”

And folks, what is going on in the macro right now is an expression of an ‘inflation trade’. So while there will be rallies along the way (silver’s sentiment and CoT data are contrarian bullish) the real lock and load buy for the sector will be when economic contraction and deflationary winds start to blow. Same as it was in 2001, Q4 2008 and on a micro scale, Q1 2016.

Meanwhile, silver continues to point toward a contrarian positive setup in the making as Commercial Hedging entities trend toward a flat short/long orientation. Courtesy of Sentimentrader.com:

Website: https://nftrh.com/

NFTRH Premium Market Report: https://nftrh.com/nftrh-premium/

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Gary Tanashian of biiwii.com successfully owned and operated a progressive medical component manufacturing company for 21 years, keeping the company’s fundamentals in alignment with global economic realities through various economic cycles.  The natural progression from this experience is an understanding of and appreciation for global macro-economics as it relates to individual markets and sectors.