"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, June 17, 2011

HUI - Gold ratio reflects the return of a deflationary mindset

If one examines the ratio of the HUI/Gold you can determine whether or not a deflationary mindset or psychology is prevalent among investors/traders.

Note that when the credit crisis erupted in full force in the summer of 2008, the mining shares underperformed drastically against the price of gold as the gold shares plummeted along with the rest of the broad stock market.

It was not until the Fed announced the inception of QE1 in the fall of 2008, that the gold shares began to outperform gold. As a matter of fact, they led the market higher.

Now that the Fed has announced the end of QE2, the gold shares are seriously underperforming against the price of gold bullion as you can see by the sharp move lower in the ratio early this year.

This is the basis behind the ratio spread trade being played by the hedge fund community and why they are able to push the shares lower seemingly at will. As long as a deflation mindset is in place, the shares will underperform against bullion. Not until we get a return of inflation fears (that will come if the Fed moves ahead with some sort of additional monetary stimulus) will the mining shares outperform gold.

I have had some critics rail against me for detailing this strategy but I can tell you from a trader's perspective, it has been an effective and extremely profitable trade. It will stay in place as long as it works and makes money for those who are using it. The hedge funds are simply too large for any other market players to take them on and challenge them on this trade. Only a shift in the deflation/inflation mindset will shake them out.

If rumblings of another case of Fed action on the stimulus front begin to surface, this ratio trade will begin to turn as the smartest ones plying it will exit while they can still secure those paper profits.

In the meantime, one has to be extremely selective in which mining stocks they buy. The weaker ones will be and are the targets of the ratio trade while the stronger ones are more resistant to its effects, even though they are seeing weakness at the present time. Once the market for the shares turns, the strongest ones now will be the leaders on the way back up. Fundamentals will ultimately determine their share prices even while these technical plays are dominating at the present.


  1. yes. Very sound perspective.
    and a basic study of various miners charts will show which ones have held up stronger .
    like.....Scorpio Mining,First Majestic,Andina Minerals,Sprott silver trust(PSLV)Aurizon,

    its not hard to see the strong ones. Fortuna Silver, another example.

    (I do own them and will buy more at the bottoms if I'm lucky.)

  2. Dan-thanks for these two articles that are both grounded in the facts and offer a reasonable perspective that makes it easier to understand what's happening in the "pits". Much appreciated!

  3. Dan,
    Is there a way to know which companies are being targeted? Thanks for what you do!

  4. Dan please give me you input on the strange trading I observed in Great Basin Gold today. The following is what I have post on a forum I frequent;

    GBG=Crazy close on hugh volume, WTF? On 6/17/11
    So the more I look into today's trading action the more WTF happened at the close reverberates in my head! Going into the last 15 minutes I believe the volume was about 2.5 million shares, (can anyone help me find out what was the exact volume @3:45 est?) so with a 2.1 million 100 day average volume everything is normal, right? I called my broker and he told me at the 4 o'clock close the volume was about 8 million shares and then in the after hour almost another 4 million shares traded as I am seeing an official volume of 11,818,000 traded for Friday the 17th of June 2011. I cannot find any press release or any news. Now at 3:59 the spread was bid $1.68 ask $1.69 and I see that 900K shared traded in the last minute moving the price to $1.73. The final quote for the day says GBG closed @ $1.78. So my question to the forum is do you think that this is just pure stock manipulation or can this be considered normal trading activity? Also does anyone think GBG will rally next week?

    Disclosesure; I have a sizeable position in GBG.

  5. I have to admit that I'm missing the frequency of Dan's postings. It's like I have info gap somewhere in my daily readings. So what does come out is well appreciated and lapped up.

    At least we still have the KWN Metals wrap to look forward to on the weekend! :)


Note: Only a member of this blog may post a comment.