Perspective on Gold Miners (NFTRH Update 10.19.11)

The technical case for gold stocks above broad stocks remains unbroken.  The fundamental case is quite bullish and the current rally is coming off of depressive gold bug sentiment.

Here is an email update sent to subscribers on October 19, along with an updated version of the chart that went with it.

It is so critical to have strength and perspective every step of the way.  The market does not care about you and in fact, makes its bones by trying to use you as fuel, or food.

'Perspective'... I write this word often, and I do so for a reason.

A tone seems to be rising among gold stock players that is becoming increasingly negative as the broad stock market out performs the gold stocks over the last several weeks.  This tone seems to come from a place that expects the gold sector to be somehow privileged and beyond the laws of TA, sentiment and over bought / over sold dynamics.

To help review, the attached chart shows HUI measured in SPX units in the top panel, along with gold (GLD) measured in euros (FXE) and Canada dollars (FXC).  This helps illustrate the theme we have been working since gold became massively over bought; namely, that the broad plays will probably out perform gold as the metal works off the unhealthy holders that momo'd it too far last summer.

Gold, despite its fundamental 'insurance' or 'value' proposition for the times has no divine right to just keep going up in service to the demands of the most gung ho gold bugs.  No, it is on a healthy technical correction to cure the momentum excess. 

Similarly, the gold stocks are being flogged and even despised in some corners as chronic under performers.  But the HUI-SPX ratio again shows that they remain in an uptrend vs. SPX, though it is a pained and unimpressive uptrend thus far.  This chart tells me that the risk vs. reward for premier gold stocks is much reduced in ratio to the formerly and dramatically over sold stock market. 

The nominal HUI remains above the big picture (monthly) support level (roughly 500 +/- 20) in a world full of markets that have broken beneath critical support.  Until this changes, the major technical condition is what it is, and that is unbroken.  Until such time as HUI drops below this level the case is unbroken. 

What is happening now is a correction and consolidation of previous bullish activity on gold and gold stocks and of bearish activity in broad markets.  Gold is correcting in relation to euros, Aussies, Loonies, etc. with a need to correct further.  This is why we have had an emphasis on significant cash levels ever since HUI 610 failed.  Current activity is draining spirits and we want to be strong during the process.

With nominal HUI at 524, support is intact.  What the sum of the above tells me is that if gold stocks are going to lose this support level - into a deflationary take down - the stock market is getting ready to drop even harder.  But that remains an "if".  Meanwhile, having plenty of cash helps one remain strong.

Regards,

Gary"

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