Analysis of Gold, Silver, and Gold Miners: Macro Fundamentals and Market Correction

The Commitments of Traders report for gold and silver suggests a potential upcoming decline in both metals as well as in gold mining stocks. It's important to note that this indicates a correction rather than the end of the bullish phase according to this sentiment measure. While the CoT data was somewhat exaggerated, it did not reach an extreme level that would be detrimental to the bullish trend.

These observations come in the context of positive macro fundamentals that have been in place since late 2022, along with a technically favorable situation for gold miners. However, there are doubts about their ability to sustain upward momentum in the short term.

Let's take a closer look at the macro fundamentals:

The gold/commodity ratios have been trending upwards.

The gold/stock market ratios have also been on the rise.

There is a potential indication of a peak in 'real' (inflation-adjusted) Treasury yields.

Inflationary pressures seem to be easing.

There is a possibility of the Federal Reserve's hawkish stance coming to an end.

The pace of economic growth and corporate earnings is decelerating.

These factors were either bullish or provided a constructive outlook prior to the correction in the precious metals complex. While they have undergone some adjustments, they have not yet been completely invalidated. It's worth noting that these developments are taking place amidst a noisy market backdrop that includes ongoing discussions on the Debt Ceiling Kabuki dance. The resolution of this issue is expected to bring positive sentiment to the broader market.

As the correction in precious metals persists, it's important to recognize that it was a likely outcome even before this update advised traders to consider taking profits on April 13, when GDX filled the second of three upside gaps we had been monitoring. The macro environment is aligning with this correction, providing a rationale for the decline in gold, silver, and mining stocks.

However, if the macro backdrop becomes more favorable for the gold mining sector and the technical parameters mentioned earlier align, it might be worth considering a contrarian approach while most investors are hesitant. It's worth noting that there is another potential gap above, suggesting further upside potential for those who are prepared. Additionally, if the macro environment continues to shift away from the current party atmosphere and becomes more counter-cyclical, the bigger picture will once again turn positive for gold mining, which is known for its unique counter-cyclical characteristics.

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