Notes From the Rabbit Hole
NFTRH
Gold Stock Correction (Fundamentals)
By Gary Tanashian December 7, 2009
Excerpted from the December 7th edition of Notes From the Rabbit Hole (NFTRH62) Below is a brief excerpt from what was an extensive technical and fundamental view of gold and especially the gold stocks in light of Friday's dramatic downturn. While gold and gold stocks screamed higher of late, even gaining mainstream media attention, experienced traders and investors were aware of increasing odds of a hard down. Check, we are there. NFTRH62 went into a lot of technical detail on various downside targets (and thus, opportunities) based on different time frames and support levels. In all, 6-1/2 pages of a 14 page letter were devoted to the sector that has been ripe for correction since our long standing upside target of 475 was pierced. This is the sector with which I am fundamentally engaged and finally, after weeks of upside hysterics, rational traders can begin to gauge opportunity. After all, what good are the technicals without a thorough understanding of investment merit (fundamentals) to non-day traders? Below is a brief review of some of those merits as represented by the gold-silver ratio and gold's ratios to several other assets of positive correlation to the global reflation attempt. Gold Stock Correction (Fundamentals) Now let’s turn our attention to the Gold-Silver ratio (GSR) which has closed below the would-be breakout (black) line. Please understand that if and when gold does break out in ratio to silver, the risk of corrective activity increases for the gold stocks as the miners are led more effectively by silver. Thus, Friday’s hard down in the HUI is unconfirmed by the GSR, which does however remain in its short term up channel. Yet it is a rising GSR, in conjunction with gold’s rise in positively correlated things (lower panels) that would signal the next leg up in gold sector fundamentals. I know I repeat this often – as it is a difficult concept for some people, after years of taking in the propaganda of the commodity bulls – to get their heads around. The buying opportunity comes when gold stock babies are thrown out with the broad market and commodity complex bath water, even as their fundamentals – as indicated by gold’s out performance to silver and positively correlated assets – improve by leaps and bounds. As it stands now, the GSR is still attempting to rise and gold’s ratio to the S&P, oil and copper (lower panels) remains in a bottoming to upturned stance. Risk remains high all around.
To conclude the general precious metals discussion, gold got ahead of itself and despite bullish fundamentals, was due for correction after the [short term] measured breakout target of 1100 was exceeded by a wide margin. The monetary metal took a hit in all major currencies but remains in an uptrend vs. same. Really, with all those gold ads on the FOX news channel and all the media hype about the death of the dollar [chart shown later in the report], did we not expect a reaction? Was it a good dose of coordinated manipulation by the wizards, a day after Mr. Bernanke sat and sang for his supper under the guise that inflation is under control? Well, hell yeah. Does it matter in the big picture? Hell no.
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