Gold Stocks Versus Bullion: Inflation 101

Gold price bulls and bears may all be getting a bit frustrated now, as gold refuses to follow their predicted paths…and simply meanders sideways. 

This is the daily gold chart. 

Gold is well-supported in the current price zone.  Institutions are buyers on minor dips, but the next major move to the upside is unlikely to happen without a significant fundamental catalyst.

Janet Yellen makes an important speech at Jackson Hole later this month.  For decades, I’ve viewed the August 7^th – October 31^st time period as US stock market “crash season”.  If Janet causes the stock market to stumble with stronger words about a possible rate hike in September, it could quickly send gold toward my $1432 target.

The US election, French election, and an Italian referendum are also potential price drivers.  The current global macro situation is a good one for gold price enthusiasts, but in terms of time a bit of patience is required.

Goldman’s view of what Donald Trump brings to the table (more government spending) may not sit well with members of his fan club, but the entitlements funding nightmare is something that neither US candidate seems to want to address with any degree of seriousness.

It’s impossible to significantly reduce government spending’s horrifying drag on the US economy without facing that entitlements nightmare directly, and taking the brutal action needed to cut the fat.

So, I’ve categorically stated that the election of Hillary Clinton is good news for gold, and the election of Donald Trump is great news for gold.

In France, ongoing terrorist attacks have destroyed Hollande’s chances of getting elected again, and the opposition nomination takes place in November.  Hollande is one of the most prolific spenders in the Western world. To be sure whoever takes over his position, takes over what is really an economic disaster zone.

Together with the US election, the French nomination process should incentivize more money managers to buy more gold.

I’ve argued that QE was deflationary, and it would be replaced with government stimulus spending, perpetual bonds and gold revaluation.

It’s a process that will take some time, but clearly some top mainstream economists are beginning to take the same viewpoint. In the big picture, the world is not moving from risk-off to risk-on, but the main theme is transitioning from system risk to inflation risk.

This is the key gold stocks versus gold bullion quarterly bars chart. 

Even after the “barn burner” rally during the first half of 2016, the XAU index is barely above its 2008 lows!  Clearly, this a massive accumulation zone. 

Understandably, there will be drawdowns for accumulators.  Investors need to bring a good measure of intestinal fortitude to the table to handle those drawdowns. 

Regardless, gold stocks are down about 80% against bullion right now, compared to the highs set about twenty years ago.  Those highs were made when money velocity and bank loan profits peaked, and system risk became the dominant theme.

As the transition into a government stimulated inflationary bull era for gold takes place now, good times for gold stock investors will be here for a very long time.   

I realize that a lot of investors and analysts have referred to the 2014 – 2015 time period as a “gold stocks bear market”.  In contrast, I think the use of bull and bear labels can actually be a bit of a destructive force for the wealth builder.  In the real world, emotions play a big role in investor action, and compulsive use of a bear market label can create irrational fear in a key accumulation zone.

In regard to gold stocks specifically, I called the 2014 – 2015 period the greatest accumulation zone for any asset in the history of markets.  That was a bold statement, and the price action in 2016 is already hinting that my view may be the correct one.

This quarterly bars chart of the XAU gold stocks index versus silver bullion adds even more weight to the idea that even at current prices, gold stocks are not in a momentum buying area, but a value buying area. 

Silver is very responsive to inflationary pressures, and if gold stocks are outperforming silver in a massive way, it would be an indication that inflation may be poised to rise in a much bigger way than most analysts believe is possible.

This is the hourly bars chart for oil. There is a great Inverse Head&Shoulders bottom pattern in play…with a target price range of $45 -$46.  As the largest component of most commodity indexes, an oil price rally can create substantial inflationary concerns amongst institutional investors, particularly at this late stage of the business cycle. That’s great news for gold stock enthusiasts!

This is the superb GDX daily chart.  A new Inverse Head&Shoulder bull continuation pattern has appeared. Subsequent to a needed pullback to form the right shoulder low, GDX should be ready to make a beeline to my $33 and $37 target prices!

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Special Offer For Gold-Eagle Readers:  Please send me an Email to [email protected] and I’ll send you my free “Gold Stocks Election Day Fun!” report.  As the US election approaches, I think more institutional money managers will realize that governments are about to ramp up spending rather than cut anything, and the money managers will engage in another large bout of gold stock buying.  I cover ten gold and silver mining companies that should shine brightest by election day!

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