Tuesday, December 16, 2008
Bone crushing gains
Gold stocks have re-emerged and are telegraphing their upcoming outperformance relative to general stocks in grand style. Alas, the first gold stock mini-advance leg will likely be over before the month of December is, but it has been a wonder to behold. Blue chip leaders in the sector such as GG, AEM, KGC, and RGLD are either even or ahead on a 1 year return basis and have had gains of 100-150% (not a typo) since the bottom in this sector 2 months ago. How many stocks can claim these stats after the crash we just went through?
After today's rate cut, the Fed is "all in" on this game of chicken with deflationary market forces that risks the value of our currency. The fight to re-inflate the system is on as bankers go through withdrawal and margin calls and require easier and easier money to stay high and solvent, respectively. Always vote for market forces to trump bureaucrats. Deflation is too powerful to be stopped in the short-term. Gold is your insurance policy in case the government gets so reckless that a currency crisis develops sooner rather than later, but the deflationary play on gold miners is valid and acting as advertised.
The gold to oil and gold to commodities charts look very "toppy" and are running out of gas on daily charts, suggesting a correction in these ratios and the gold stocks as well:
I am familiar with terminal wedges on charts and have both lost (first) and made (after I learned my lesson) money on this type of pattern. Human folly repeats.
Both the gold stock and general stock rallies will likely be over before the month of December before they take a break. I will be looking to get 100% long gold stocks after the anticipated upcoming correction, which should end by mid-February of 2009. You don't want to miss the gains from winter to spring of 2009 in the gold stock sector, which is only a taste of what's to come in this sector over the next few years.