Gold Miner Stocks vs. Inflation
Gold Miner Stocks vs. Inflation from Bullion Vault
I WANT to try to answer a subscriber’s question as clearly as I can because it really does seem to be more confusing than it actually is, writes Gary Tanashian in his Notes from the Rabbit Hole.
It’s always made sense to me but I understand there is a promotion machine out there selling viewpoints and in the gold sector especially, it is often wrong-headed, lazy analysis using tired assumptions.
“I do have a couple of questions that relate to gold/gold miner stocks that I can’t seem to get my head around. No hurry on an answer, just when you get time: From time to time, you have mentioned that inflation would send the gold bugs scurrying for cover. I had always thought that gold would rise during inflationary periods so I can’t seem to get why inflation would not be good for gold. And on the middle ground; how would gold likely act if we experience a prolonged period of stagflation?”
I try hard to make the point that the gold miners often rise during inflation but if/as gold under-performs cyclical commodities and assets their bottom line fundamentals are affected because in theory at least, their cost inputs are rising faster than the price of their product. So I am not bearish on gold miners during inflation. I am bearish on their fundamentals. Big difference. Some of the biggest gains in HUI have been during times that the fundamentals were degrading. That’s because the inflationist bugs are on board.
Conversely, some of the worst selling events happen while the fundamentals are screaming higher. Look no further than Armageddon ’08, the Q4 2008 deflationary crash in everything, as gold declined but it sky rocketed vs. everything but the US Dollar and Treasury bonds. That was fuel to gold mining bottom lines and an epic buying opportunity. I equate this to inflationists giving up the ship when the inflation fails.
Unfortunately, a gold stock promoter will generally not look at these dynamics because they are a nuisance to the perma-bullish view. Similarly, perma-bears will not look at them either. Gold stock bears often point to the lack of inflation as a reason to be bearish on gold stocks. Wrong Way Corrigans, the whole lot of them. Which is why I came up with a little cartoon indicating the best macro fundamental conditions for the miners [generally, the larger the planet the more important the consideration].
It is also why I tell you that the moment things turn against the sector we will be aware of it and take action against it. Frankly, I don’t much like being a gold bug because it means I am not feeling good about the world’s situation, especially its financial and economic situation. And I don’t like being.