Deflation Is Bullish For Gold Stocks

Gold-bearish Western bank economists are very lucky.  They can gleefully ignore Indian black market imports in their assessment of demand and supply, and nobody questions them.  

Thus, a tiny outflow of gold from Western ETFs in September is relentlessly highlighted as a harbinger of gold price doom, while recent reports that India is importing more than 15 tons a week in the black market, are swept under the rug.

Unfortunately for the bearish economists, they can’t ignore official imports in India.  The consensus among economists was for Indian September official imports to come in at about 60 – 80 tons.  Please click here now.

The official imports soared to 131 tons for September.  It did so with all the import duties fully in place.  That can’t be ignored, and coupled with another 60 tons of unofficial imports, total demand was probably about 190 tons.

I’ve argued that the biggest game changer for gold price discovery would be the addition of more LBMA-certified refineries in onshore India. 

Rajesh Khosla runs India’s only LBMA-certified refinery, and he’s calling for more to be built, to encourage FDI (foreign direct investment) in India’s jewellery industry. 

Indian Prime Minister Narendra Modi takes great pride in his track record of encouraging economic growth.  Gold jewellery is the second largest employer in India.  It will become harder and harder now, for Modi to remain silent about gold….the world’s ultimate asset! 

To view the entire article, please click here now.  It’s critical that members of the Western gold community understand that the monetization program proposed by Khosla and the bullion banks only targets about 250 tons a year of scrap gold. 

The bulk of the refining would be aimed at gold that is mined by Western mining companies.

Demand skyrockets in India.  A week ago I urged short term traders and options players to be patient, and wait for my price stoker oscillator to reach the 21 area, before buying.  It’s there now, and gold looks ready to launch an assault on overhead HSR (horizontal support and resistance), in the $1240 area.

The meltdown in Japanese and European GDP has caused most fiat currencies to sink against the dollar.  In the big picture, this is likely to increase inflation in China, and could create a significant increase in gold buying, by inflation-wary citizens. 

The US dollar is strengthening on economic weakness in other nations, rather than on economic strength in America.  That’s very dangerous.  Global demand for oil is collapsing, and the dollar rally is exacerbating the problem.

If oil prices decline further, the entire fracking-focused US oil boom is at risk of imploding.  If that happens, America could be thrown back into recession. 

In the short term, the dollar rally seems overdone.  The weekly chart shows the Canadian dollar arriving at significant buy-side HSR, in the 88.73 area.  A rally towards the 90 – 91 zone would likely coincide with gold rising towards $1240.

I’ve argued that oil price deflation could create a massive rally in gold stocks, while gold rises modestly, moves sideways, or even declines slightly.

That’s because falling oil prices are reducing the cost of mining gold.  Note the RSI oscillator.  It’s turning sharply upwards from the 30 area on this daily GDXJ chart.

Junior gold stocks are dear to the heart of the Western gold community, and I’m looking for an initial rally towards $34.22, with follow-through action to the $36.76 area.

If oil declines further, while bank economists begin to acknowledge the gargantuan surge in gold demand that is occurring in India, they may begin to aggressively recommend gold stocks to their high net worth clients.

With the prospect of rising interest rates, money managers are nervous about moving money from stocks to bonds.  Gold stocks are the only sector of global equity markets that should be of interest to value-oriented fund managers. 

A major decline in oil prices that causes a collapse in global stock markets while Indian gold demand surges, is likely to entice those money managers to recommend gold stocks to their clients.

As the dollar has rallied, the price of silver has declined significantly, and the gold to silver ratio has soared to the 70 – 80 area. 

What are the implications for silver, if there is a global stock markets crash caused by deflating oil prices?

That’s the monthly chart of the gold to silver ratio.  I sold about one third of my physical silver position for gold in 2011, and I’m starting to buy it back in small stages now, using my pyramid generator to systematically allocate capital.

I view the 70 – 100 gold to silver ratio area as offering value for silver investors, and the 45 and lower area as an area of value for gold investors.  If the United States economy collapses back into recession because of deflating oil prices, there’s no question that the gold to silver ratio could rise even higher. Regardless, the dropping cost of mining, would likely mean that silver stocks would enjoy the same type of interest from institutional money managers as gold stocks!

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Stewart Thomson 

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