Post-PPI: Investors' Misperceptions About Gold And Inflation Will Provide Opportunity

The April PPI report came in to the disinflationary side, and as a side note unemployment claims jumped to the highest level since 2021. This has inflation-centric goldbugs scattering out of inflation sensitive markets, a label the majority of them wrongly assign to gold and worse, gold stocks. If you could set your watch by these moves you could sell hard and await the inevitable buying opportunity they produce.

On this cycle I have been much lighter on gold stocks than I will be when the next buying opportunity comes as inflation-centric bugs scatter amid accelerating real fundamentals (that have little to do with inflation and much to do with gold's ratios to cyclical assets and markets), probably amid a deflation scare if our existing theme, to which I strongly considered an alternative last weekend, manifests. But as yet, no Dedollarisation as USD holds support after the weak inflation data this week.

Market charts courtesy of TradingView.com:

Weakening inflation data implies a weakening Fed. But our thesis is that the Fed will have brought about a new leg of the broad stock market bear before it begins to reverse policy. A weak Fed implies a weak dollar, but impulsively declining asset prices could imply a liquidity crisis, which we are watching for in the second half of 2023. Where do investors run during a liquidity crisis?

They tend to favor gold over silver. Here is the state of the Gold/Silver ratio (GSR) taking a hard bounce:

And they tend to stampede into the currency many have spent the last extended period of time railing against, the global reserve currency. The US dollar may be subject to the negative inputs noted in my 'Dedollarisation' article linked above, but a liquidity seeking herd trumps all during a crisis.

Of course, USD is only just sitting at support as the economic data continue to erode the Fed’s resolve to fight inflation and by extension, support the dollar. CME Group sees no hike in June, a near even bet on a rate cut in July, and an overwhelming majority in the .25 to .50% rate CUT camp by September. The Fed’s rate hike regime is over, as we've been stating lately.

CME Group

While USD is floundering, it is still above support. Is the GSR leading it upward? You’ll want to get a handle on that question because if they both turn and burn the implication is draining macro liquidity, which is the exact best fundamental backdrop for the gold mining sector because in that event gold may not go much of anywhere, but its ratios to most cyclical markets sure will. Those cyclical markets include mining cost inputs like Energy and Materials.

As for cyclical vs. counter-cyclical, you can see that within the metals complex the premier counter-cyclical metal is furthering its upward break vs. the cyclical, inflation-sensitive one. This is bad news for inflationists, commodity bulls and cyclical players the world over unless somehow the Dedollarisation play manifests per the links above.

Meanwhile, the damage done to inflationist gold bugs remains untold as the pervasive belief is that gold and by extension gold miners, are good vechiles for inflation. They are not. You can buy from them when they are regurgitating positions because “OMG… THERE'S NO INFLATION!!!”

As inflation continues to decelerate, opportunities shape up. Opportunity to get trampled if you’re all in with the inflationist herds, and opportunity to capitalize if you’ve kept perspective on the best macro for the gold mining sector. Today we are still in the disinflationary Goldilocks phase and as such, Tech may continue to be firm and in a leadership position for a period, as has been the case all year.

The next phase will likely either be a deflation scare per our original and ongoing plans, or if USD loses support and breaks down within its longer-term bull market, an inflation trade similar to the 2003-2008 cycle, only on a more compact time frame. Ironically, this second option is not a positive fundamental backdrop for gold mining, but that did not stop the HUI Gold Bugs index from rallying 300%+ on the ’03-’08 cycle (before the well deserved crash in Q4). Just as ironically, selling events often come about in the gold mining sector even as its fundamentals scream higher amid deflationary pressures (witness Q4, 2008).

If the US dollar is not sacrificed in a global asset party – as speculated upon in the Dedollarisation article linked above – we are talking post-bubble stuff here and what could be a long phase of positive performance by quality gold mining operations after the bubble pops.