The HUI index has bounced 21% since December 15th. It’s important to keep in mind that the precious metals sector tends to be very volatile. Yes, it’s pulled back 43% from its August 4th high of 284, but at that point it had been up 184% from January 19th low close. This type of volatility is characteristic of the sector and 40% pullbacks after triple-digit moves up have been not uncommon occurrences over the last 15 years.
Obviously the miners will not move higher unless the expectation of the market is that gold
and silver will move higher. The gold/silver ratio hit 84 in early 2016 and dropped down to 64 by July. It bounced back to 74 right before Thanksgiving. Currently the GSR is 71 and is forming a beautiful downtrend formation (click to enlarge):
Just to clarify, a falling GSR is one of the signatures of a powerful bull market move in the
entire sector. In 2008 the GSR hit 100 and by early 2011 it had hit the low 30’s. We’d like to
see this ratio go below that 64 reading sooner or later to extend the downturn pattern.
Another catalyst that will help drive the sector higher is the bond market. The metals have
been correlated with long term bond prices this year. That’s not to say that the sell-off since August was caused by higher interest rates per se, but the correlation has been present. In our opinion, the Fed is boxed in still and can’t raise rates anymore this year despite its threat to implement 4 rate hikes this. We saw how a similar threat played out in 2016. Once the market fully understands that short term rates are not going to be pushed higher by the Central Banks, there will be a torrid rally in bond prices that will help fuel an extended move higher in the metals. This will also be accompanied by decline in the dollar.
Shanghai is extremely busy. Just a brief summary of the fundamental factors affecting the
physical market in the east. Despite all of the misinformation about India’s gold market being freely disseminated by the western media, the demand for gold in India has picked up considerably. It appears Modi’s move to reduce cash in that economy has stimulated demand for gold. No shock there. HOWEVER, and this is where it could get very interesting, India’s trade ministry has proposed a cut in the gold import duty to 6% from 10%. That’s not to say it’s a done deal, but India’s Budget announcement is scheduled for February 1st, which is when we’ll find out if the import duty will be cut. This would trigger huge demand for gold imports.
In today’s episode of the Shadow of Truth, we discuss the factors that we believe are “brewing” to drive the next leg of the gold bull market: