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Wednesday, December 19th, 2018 - Buy Gold - Bringing you trusted gold news and gold investing information since 2006

Do Gold Mining Stocks Qualify as a Contrarian Trade?

It never fails to amaze me how delusional most investors / traders are, or should I say how inconsistent people are with trading practices and practices in real life. Let me give you an example of what I mean. Would you take a doctor seriously if you went to him complaining of a headache and he merely “prescribed” you a pain killer and told you to go to bed, with no other questions asked? Well then why do you take the commentary of an “analyst” or “trader” seriously when they talk of a double top, head and shoulders etc of gold and silver? Suffice to say this – the behavior of the price of gold and silver is merely a symptom of an underlying condition / theme. If you know where this theme is going to be in say 12 months from now, then you don’t have to pay any (albeit little) attention to the price of gold and silver.

Now what is the primary driver of the price of gold and silver? I would say inflation. So are we not a whole lot better off if we ignore the noise in the price of gold and silver and concentrate on the inflation theme instead? I think so.

How do we identify the trend of inflation? I would say via the behavior of commodity prices in general. Rising commodity prices is a dead give away of rising inflationary pressures. Now here is where it starts getting a little more multi-dimensional. Although commodity prices are quoted in USD terms they are ultimately paid for in multi-currency terms. Cutting a long story short – rising inflationary pressures globally are evidenced by rising commodity prices in multi-currency terms. We now have this condition. Take a look at the two charts below, it is the CRB Index in AUD and JPY terms (two of the stronger performing currencies). Since the start of the year the CRB has registered multi-month highs!

We could get a little more “micro” and look at the behavior of related commodities like base metals. Although the chart below is the LMEX Index (index of 6 base metals) in USD terms I don’t think it requires too much imagination to picture what it would look like in multi-currency terms. In any event, note that in USD terms at least, it is within the width of a whisker of an all time high and showing no loss of momentum.

When it is all said and done the trend for commodities is up, beyond reasonable doubt. I would be somewhat worried about the price action of gold and silver if there was accompanying weakness in commodities in general in multi-currency terms and with base metals. There is absolutely no evidence of that. I guess this begs the question– how much more upside can we reasonably expect to see in commodity prices? Put it this way – for every action there is an equal and opposite reaction. We have seen money printing over the last two years on a scale not witnessed in modern history. We are now going to pay the price for all this money printing through levels of inflation also not witnessed in modern history.

I think being short precious metals and gold stocks over the coming months will be the quickest way to the poor house! Why all this negative sentiment towards gold stocks exists is totally beyond me. I think being long gold stocks qualifies as being a contrarian trade. I certainly know of no general equity fund that has a direct exposure to gold mining stocks, I see no parabolic price behavior and I don’t see implied volatility in options on Gold stocks being quoted anything remotely out of the ordinary.

Disclosure: I am long GDX, SLV, GLD.

Additional disclosure: Long OTM Jan 13 Calls on GDX

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