Although the waiting is the hardest part. The next phase of the
credit contraction and next down leg in the bear market is set to begin. Elliott Wave just announced that on a recent day there were only 3% bulls on
a daily sentiment index for the US Dollar. Now I don't care what you think
about the Dollar or it's ultimate fate, a trader should be interested in
taking the other side of that trade!
The Dollar may have already bottomed and simply need a short
correction (i.e. less than 2 weeks) before a major thrust higher, which would
put a stake in the equity, corporate bond and commodity rallies. I think Gold
will initially get hit but will then stabilize in the $880 to $920 range.
Here's a 2 year daily US Dollar chart:
The Volatility Index ($VIX) remains within or has just barely
escaped from (depends on how you draw the lines) a terminal corrective wedge
and is coiled like a spring ready to begin its next sustained bull move.
Here's a 2 year daily chart of the $VIX:
Remember that Gold stocks are countercyclical assets during a
deflationary bear market and Gold stocks already made multi-year lows last
fall. They will not be making new lows along with the stock market because as
deflationary pressures intensify (and they will, believe me), Gold miners will become more profitable. This can be expressed using a "real" price of Gold
that ignores the fiat price per ounce and compares the price of Gold to other
commodities (i.e. mining costs like energy). The Gold to oil ratio chart is a
thing of beauty for Gold stock bulls right now. Here's a 2 year daily chart
of the Gold price divided by the oil price ($GOLD:$WTIC):
Though Gold stocks are not immune to major downturns in the
stock market, they can weather them well once their uptrend is established
and will rise on net balance. Because I am expecting serious nastiness in the
general stock markets, I am even more cautious about buying Gold stocks at
the right time. The pending buying opportunity that should occur in the next
few weeks is a little bit of a mystery right now and its character will be
important. A mild, wimpy bottom will likely have to be re-tested later this
fall and won't get me very excited (should still be a decent multi-week trade
for those so inclined, though). A strong, panicky spike bottom will present
the buying opportunity of the year in my opinion.
The bittersweet irony for Gold stock investors is that a turn up
in the Gold to commodities ratio or "real" price of Gold typically
indicates an intensification of the credit contraction in this environment,
which is bearish for all stocks. This is counterbalanced by the immediate
increase in profitability that can be achieved by unhedged Gold miners when
this ratio turns up. On balance, Gold mining stocks will rise, but the
corrections will likely be jagged and scary due to the overall stock market
environment.
A bottom in the Dollar and the $VIX and a top in commodities,
stocks and corporate bonds as well as a tradeable bottom in senior Gold
stocks - it's all finally starting to come together although no one knows the
exact day it will occur. It's been very difficult being bearish over the past
few months, to be sure, but the light at the end of the tunnel is now clearly
visible. Now is not the time for bears to capitulate.
Adam Brochert
GoldVersusPaper
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