A Look Ahead As Gold Stocks Resume Rally, Broad Market Shakes Off Mini Correction

Gold stocks rally with the broad market, and continue leading it

The gold stock sector has not been unique since the spring, when it was relatively strong while cyclical markets imploded under the pressure of Tariff mania. However, once the broads got on board the rally theme gold stocks have been part of the party (not unique) and leaders of it.

The GDX/SPY ratio pulled back hard in October, led a pullback in the broad markets, and gold stocks have since recovered leadership after holding the uptrend.

Frankly, I was more than open to a deeper correction in gold stocks, as well as in broad stocks. But if the holiday silly season is not distorting market signals (always a possibility) during Thanksgiving week, gold stocks are back in the saddle. The precious metals complex is being led by the Silver/Gold ratio’s big time push through its recent double top after only registering a drop to the 50 day moving average.

I for one had at least even odds of a deeper decline. But it appears that da boyz have a different idea.

Again, it’s a holiday shortened week, but taking things at face value, this is quite notable as the Silver/Gold ratio rams upward, ending the double top’s efficacy. Again, all we got was the 50 day average. Similarly, the GSR had only bounced to its SMA 50 before soiling itself.

“Inflation Trades” Sooner Than Expected?

If the signaling can be trusted during holiday silly season, the implication is positive for silver, gold and gold stocks, but not so much in the fundamental way a deflation scare would be positive. Silver’s leadership would be a positive price signal.

A rise in the Gold/Silver ratio along with a rise in USD would indicate a negative price signal for gold stocks even as their fundamentals improve yet again (as gold would outperform gold mining cost input markets). That’s the classic Q4, 2008 and Q1, 2020 playbook where buying falling miners as their fundamentals scream higher worked out great, as was logical.

But the signaling above is lurching opposite a deflation event. And if it is real it would signal that our “inflation trade” plan is ahead of schedule. For more on that please review this November 16th post:

Ah, but it’s holiday silly season. I/NFTRH will plan to manage the market we have at any given point, but obviously be open to adjustment, if not revision. The market we have at this point is that gold stocks, other commodity related stocks and broad markets are poised to take another leg up. This was our original plan for Q4, after all, before I started galaxy braining the idea that it could come from significantly lower levels.

The thing is, if the anticipated year-end rally is starting now we’re likely going to make our bones quite well in the near-term. But had it started from lower levels (for example GDX low-mid 50s, SPX at its pattern top at 6120) the pipes would have been cleaned out for a more sustainable future bull leg.

With gold stocks leading what I consider to be a potential bull-ender in the stock market, I do not anticipate being bullish for as long as I would have had GDX banged the clear support noted in the mid-50s. As it is, today’s signaling advises we take the near hit of the 50% Fib pullback area around 68 and run with it, for a while.

As for SPX, it would only have pulled a 38% Fib retrace (not illustrated on chart) of the entire rally out of April had it dropped to pattern support. That pig very likely has a date with destiny within the next few months. Again, gold bugs, the gold stocks are in alignment with, and leading the process.

At worst we’ll get a pervasive correction in some areas and bear market in others. At best, if the inflation trades crop up, we’ll probably get commodity related stocks doing at least as well as gold stocks, as per the 2004-2008 analog, when it all went up but gold stock fundamentals degraded.

Bottom Line

Options:

1. Party now, pay (not too much) later.
2. Correct harder now, prior to more sustainable bull markets.
3. Party now, and keep on partying with a rotation to the “inflation trades” with the stock market just getting by. That is in line with this analog from the inflationary 1970s as nominal stocks kept up appearances, but not in relation to gold. That was a bear market in “real”, gold-adjusted terms.

Unless this is an unusually cruel holiday week whipsaw, option 2, which I had given a good amount of respect, now seems unreasonable. Options 1 & 3 appear reasonable. Either way it appears we party for a while.

Boyz?

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