[Here is a brief excerpt from a commentary published at www.speculative-investor.com on 21st April 2024]

Gold recently became extremely overbought in momentum terms against ALL major fiat currencies. For example, the following daily charts show that based on the daily RSI(14), a momentum indicator included at the bottom of each chart, gold recently became as stretched to the upside as it was at any time over the past 15 years, including at the 2011 major peak, relative to the euro, the Yen, the Swiss franc, the Australian dollar and the Canadian dollar. Looking at it from a different angle, in momentum terms the euro, the Yen, the Swiss franc, the Australian dollar and the Canadian dollar recently became as stretched to the downside relative to gold as they have been at any time over the past 15 years.

Against the US$ gold did not become quite as stretched to the upside in momentum terms, because the US$ recently weakened by less than the other major currencies.

With gold having just hit a rare overbought extreme against all major fiat currencies, the probability is high that the gold price has either just set a multi-month price top or will soon do so. For two main reasons, however, it’s unlikely that the April-2024 extreme will mark the end of the cyclical rise in the gold price (meaning: the end of the cyclical decline in fiat currency).

The first reason is sentiment as indicated by the COT data, which still shows a healthy degree of speculator scepticism. Of particular relevance, despite gold’s spectacular recent price rise the collective net-long position of small traders (the proverbial dumb money) in gold futures remains not far from a 14-month low.

The current sentiment situation suggests that there is still a lot of scope for speculator long accumulation.

The second reason is the high probability that the fundamental backdrop as indicated by our Gold True Fundamentals Model (GTFM) will shift in gold’s favour over the next several months.

The GTFM turned bearish during the week before last due to a rise in the 10-year TIPS yield (a real interest rate proxy), but it returned to neutral last week due to the breakdown in the XLY/XLP ratio mentioned in the Stock Market section of today’s report. It stands a good chance of turning bullish in the not-too-distant future, because 1) a shift within the stock market from risk-on to risk-off has been confirmed, 2) US economic data probably will have a weakening trend, 3) the Fed (meaning: Powell) is looking for an excuse to loosen monetary policy, and 4) the Biden administration will be ‘pulling out all stops’ to make the economy appear healthy during the lead-up to the November-2024 election.

[This blog post is an excerpt from a recent commentary at specuative-investor.com]

We consider gold bullion and the S&P500 Index (SPX) to be effectively at opposite ends of an investment seesaw, with the SPX doing better when confidence in money, central banking and government is rising and gold doing better when confidence in money, central banking and government is falling. As discussed in a few TSI commentaries and blog posts over the past two years (for example, HERE), our investment seesaw concept was part of the inspiration for the Synchronous Equity and Gold Price Model (SEGPM) created by Dietmar Knoll.

In general terms, the SEGPM uses historical data to define a quantitative relationship between the SPX, the US$ gold price and the US money supply. More specifically, it is based on the fact that adding the SPX to 1.5-times the US$ gold price (and applying a scaling factor) has, over the long-term, resulted in a number that tracks the US money supply. Consequently, it indicates the extent to which the combination of the US stock market and gold is currently under/over-valued compared to the money supply and can provide clues regarding likely future price levels for gold and the SPX. For example, a forecast of likely future levels for the SPX and the money supply would project a likely future level for the US$ gold price.

The following monthly chart shows our version of the SEGPM. On this chart, the red line is US True Money Supply (TMS) and the blue line is the Gold-SPX Model (the sum of the S&P500 Index and 1.5-times the US$ gold price, multiplied by a scaling factor).

The Model’s current message is that at today’s levels of the money supply and the SPX, the gold price (around US$2150) is in the right ballpark. A much higher ‘fair value’ for gold would require a larger money supply and/or a lower SPX. For example, if the money supply were 5% larger and the SPX were around 4200 (about 20% lower than it is today), the Model would indicate a ‘fair value’ for gold of around US$3200/oz.

In the middle of last year (the last time we discussed the Gold-SPX Model) we thought that the low-$3000s for the US$ gold price was a plausible target for the first half of this year. While it is not out of the question that this target will be reached during the first half of this year, this is no longer a likely scenario because the SPX has performed much better than we thought it would. However, there is a good chance that the low-$3000s will be reached before the end of this year.

[This blog post is a brief excerpt from a commentary published at speculative-investor.com last week]

The combination of the ISM Manufacturing New Orders Index (NOI) and the yield curve, our two favourite high-frequency leading indicators of US recession, has been warning of imminent recession since September-2023. Clearly, the warning has not been timely in that no recession has materialised yet. Furthermore, a month ago we noted that while the message of the yield curve was unchanged, the NOI had just risen by enough to move well above its recession demarcation level of 48. Although this did not cancel its recession warning (it would have to move above 55 to do so), January’s rise to 52.5 was unexpected. Have subsequent data provided useful new clues?

The answer is yes and no. The following monthly chart shows that the NOI turned back down in February, meaning that its recession warning is intact. At the same time, the SPX made a new all-time high as recently as Monday 4th March. As previously advised, it would be unprecedented for the SPX to make a new 52-week high AFTER the official recession start time.

This means that recession warnings remain in place, but the earliest time for the start of a recession has been pushed out again. Specifically, the March-2024 new high for the SPX suggests that a recession will not start any sooner than May-2024.

By our reckoning, during the first half of 2022 the US economy entered the bust phase of the economic boom-bust cycle caused by monetary inflation (rapid monetary inflation causes a boom that inevitably is followed by a bust as the receding monetary tide exposes the boom-time mal-investments). The bust phase almost always culminates in a recession, although it doesn’t have to.

So far, the performances of commodity prices in both US$ terms and gold terms are consistent with an economy in the bust phase, in that the GSCI Spot Commodity Index (GNX) made a 2-year low in US$ terms in December-2023 and currently is near a 3-year low in gold terms. The following daily chart shows GNX in gold terms. What’s not consistent with the bust phase are credit spreads, which have returned to their boom-time levels. Note that the narrowness of credit spreads and the strong upward trend in the stock market are linked, in that they are both symptomatic of a widespread view that a new boom will begin without a preceding severe economic downturn.

The above-mentioned conflict will have to be resolved over the months ahead by credit spreads widening substantially in response to evidence of economic weakness or by the prices of industrial commodities rising substantially in response to evidence that a new boom has been ignited. We think that the former is by far the more likely outcome.

[This blog post is an excerpt from a recent commentary at speculative-investor.com]

The HUI peaked at over 600 way back in 2011 with the gold price about $100 lower than it is today. However, this provides no information whatsoever regarding the HUI’s current value or upside potential. The reason is that the average cost of mining gold is much higher now than it was in 2011. Due to the ever-increasing cost of mining gold, over time it takes a progressively higher gold price to justify the same level for the HUI. Putting it another way, due to the increasing costs of mining gold and building new gold mines, the price of the average gold mining share is in a long-term downward trend relative to the price of gold. An implication is that the HUI isn’t necessarily cheap today just because it happens to be more than 60% below its 2011 level.

Over periods of two years or less, however, the ratio of a gold mining index such as the HUI to the price of gold bullion can be indicative of whether gold stocks are cheap or expensive. This is because the average cost of mining gold usually doesn’t change by a lot over periods of less than two years.

The following daily chart of the HUI/gold ratio suggests that at the moment they are cheap. In particular, the chart shows that at the end of last week the HUI/gold ratio was near the bottom of its 2-year range — very close to where it bottomed in September-2022 and October-November-2023.

This doesn’t mean that a substantial rally is about to begin. On the contrary, in the absence of a major geopolitical scare we doubt that there will be anything more than a countertrend rebound over the next few weeks. This is because the risk-on trend is still very much intact in the stock market, the gold/oil ratio has begun to trend downward due to temporary strength in the oil market and a downward correction in the bond market has not yet run its course. What it means is that in the short-term there is not much additional scope for gold mining stocks to weaken relative gold.

By the way, we did not expect that the HUI/gold ratio would re-visit its 2022-2023 lows at this time. Our expectation was for a normal correction from the late-December high, which would have taken the HUI/gold ratio no lower than its 40-day MA (the blue line on the chart) before the short-term upward trend resumed.

Gold mining stocks also look cheap at the moment relative to general mining stocks. This is evidenced by the following chart, which shows that the GDX/XME ratio has almost dropped back to its lows of 2022 and 2023 even though gold has been trending upward relative to the Industrial Metals Index (GYX) since the first half of 2022. The comparison of the GDX/XME ratio and the gold/GYX ratio suggests that gold stocks have some catching up to do.

A cycle peak for the GDX/XME ratio is ‘due’ this year, so the catching-up should begin soon. We suspect that gold mining stocks will reach their next cycle peaks relative to general mining stocks in the same way that a character in an Ernest Hemmingway novel described how he went bankrupt: “Gradually and then suddenly.”

So, a reasonable argument can be made that gold mining stocks, as a group, are cheap right now. At least, on an intermediate-term basis they are cheap relative to gold bullion and general mining stocks. This provides no information about likely performance over the next few weeks but creates a good set-up for large gains to be made within the next six months.