Chart Presentation: Gold Miners Redux

Human nature being what it is the sentiment is most bearish at the bottoms and bullish at the tops. We wrote, for example, that the one trade that appeared the hardest to make at the start of the third quarter of 2007 was selling bank shares. At the beginning of 2009 we noted that the hardest trade was apparently being long almost anything aside from bonds and cash. As we have written again and again about the prospect of an asset price recovery our sense is that most have treated our views in the same manner that they react to things that slither away when a rock is lifted.

NEW YORK — European stock markets rallied for a third day Thursday as talk of government support for troubled banks grew louder.

The point, we suppose, is that the markets can only discount the same negative news so many times. If investors are trading on the prospect of a banking system collapse... prices have nowhere to go but higher if such an event fails to come to pass.

We thought that we would take another pass at the charts that we showed with respect to the gold mining shares in yesterday's issue. Chances are we will show this chart in the back pages from time to time so an explanation seemed appropriate.

Just below are two charts of the Philadelphia Gold and Silver Index and the ratio between copper futures and 10-year Treasury yields. The chart at top right is from 1995- 96 while the lower chart is from the current time frame.

Our view is that the gold mining sector is positive until the copper/yields ratio falls far enough to move below its 200-day e.m.a. line. Notice that the ratio broke the line in early 1996 somewhat ahead of the weakness that developed for the gold miners later that spring.

At present the price of copper is still strong enough relative to yields to hold the ratio above its moving average line. We have noted that we are bearish on the price of gold so this isn't a sector that we would consider from the long side  but given that there seems to be broad interest from the investing public we thought that we would at least address the issue... once or twice.

Equity/Bond Markets

We believe that this is about the right time and right place to beat this particular topic like a rented mule.

We are going to return to the charts that we used in yesterday's issue. At right is featured a chart of the CRB Index starting in 1990 and a chart of the Nikkei 225 Index beginning in 2000.

The idea is that the cyclical trend through the 2000's was almost identical to the trend during the 1990's. The chart comparison makes the point that the highs and lows were extremely similar even though they were ten years apart.

What we know for sure is that the pivot points on these two charts over the past 11 or 12 years were similar. Obviously we do not know whether this relationship will continue to work but until proven otherwise it makes some sense to stick with it. The thesis is that the cyclical trend is about to swing sharply positive into 2012.

Yet... that is only part of the story. Notice that we wrote ‘cyclical trend' instead of ‘Nikkei 225 Index'.

Our conviction is that the low point for the cyclical trend- the time of greatest pressure and stress- will be reached this quarter. In fact there is a reasonable chance that we cleared this hurdle earlier this week.

Below is a chart from 1980- 83 of the U.S. 30-year T-Bond futures and the CRB Index.

The point of maximum stress was reached in the autumn of 1981 as long-term bond prices reached a low. From that time frame forward the cyclical trend began to improve but... both the stock market and commodity markets continued to decline for another 12 months.

Below we show the CRB Index and S&P 500 Index from 2000- 2003. The point of maximum stress was reached in October of 2001 following the September 11, 2001 terrorist attacks. From that point forward the cyclical trend began to improve even though the stock market did not bottom for another 12 months.

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