"No warning can save people determined to grow suddently rich" - Lord Overstone

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NFTRH172 Excerpt 'Gold Stocks'

Gold Stocks

This is a snippet from NFTRH172 focusing on the writer's methods of viewing markets from a visual and psychological perspective. I just want readers to continually think about herds and about what it takes to be able to get contrary these herds at the appropriate times. NFTRH172 then proceeds on to actual intensive analysis of the precious metals sector and the macro market backdrop.

$HUI:$SPX (Gold Bugs Index - AMEX/S&P 500 Large Cap Index) INDX/INDX
Larger Image

I learn by looking at pictures. When I was a kid I took a psychograph test on some machine that asked me to list my favorite colors and then spit this out, among other things: "You appreciate beauty in your surroundings... you are a visual learner", and damned if the machine was not right. I am not a 'facts and figures' learner, which by the way is why you do not pay me to analyze the bottom lines of your favorite individual stocks. :-)

No, here at the newsletter with the weird name, we are going to proceed within our comfort zone, and that means we are going to be bullish when it is appropriate on a risk vs. reward basis, per simple pictures that cannot be disputed (okay, along with a few facts and figures here and there). For instance, the picture above cannot be disputed in that gold stocks are in a decade long secular uptrend vs. the broad S&P 500. The HUI-SPX ratio broke upward out of an uptrend channel with the euro hysteria, and was simply hammered for having done so.

As this process played out, risk management was employed to mitigate a particularly nasty phase for gold stock players, in anticipation of better things to come. This picture was created during the carnage to lend perspective to the proceedings. The perspective was that the HUI was simply coming back to the positive side of the risk vs. reward equation vs. broad equities, as the ratio settled at a strong support area.

Everything else is just noise in my book. We know the generally supportive fundamentals of the sector and the 'in line' valuations of quality gold companies, but this view into the mechanics of a major macro theme playing out after the acute phase of the European debt meltdown, refines and distills the process into something understandable and actionable, for visual learners at least.

Every step of the way the gold captains implored the troops as to why precious metals were a vital asset in the face of monetary crisis, and why gold stocks were a good play on the precious metals as they sported excellent valuations, not seen since 2008. Well, the market did not care about all of this egghead stuff for four - count 'em - FOUR months after the September high.

But the picture above provided perspective that would prove important for people who ultimately would like to be on the right side of things, at least where the interplay between broad stocks and the gold sector is concerned.


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