This analysis is excerpted from part of yesterday’s subscriber update in which we presented our outlook for gold, silver and GDX/HUI. When making forecasts and writing outlooks, analysts must look at a multitude of things. We usually begin by examining the macro landscape via intermarket analysis. How are the various markets trending? Which are lagging? Where are the divergences? As we begin 2013, there has been an important shift in regards to precious metals that few analysts have picked up on. The rest of our analysis filters down from this discovery.
We are speaking of the decoupling that has taken place between the equity market and the precious metals complex. This is significant because it began nearly 17 months ago. (Decouplings of three or six months are not significant). Since the euro crisis in summer 2011, the equity market has rallied nearly 30% and reached a five-year high. During the euro crisis both gold and gold shares were trading at all-time highs. GPX, an index of precious metals prices, was at an all-time high. Since that time, the gold stocks are down by more than 30%. This is what a decoupling looks like. It’s not obvious over short periods but over long periods of time.
This decoupling means that precious metals cannot begin an impulsive sustained bull move if the equity market continues to move higher. The equity market has to struggle with resistance and begin a mild cyclical bear move. While over the near-term precious metals can confirm a higher low, the 2013 success of the sector depends on the struggles of conventional stocks. What would make stocks struggle?
That is where the fundamentals come into play. At present, capital is moving out of bonds and into stocks. The consensus conventional view for 2013 is one of continued growth with a chance of increase but no threat of inflation. Yet, if interest rates rise the debt burden would increase dramatically due to the current huge debt load but low cost of service. If the cost of servicing $15 Trillion in debt is 2%, then a rise to 3% equates to an extra $150 Billion in interest expense. In other words, interest rates cannot be allowed to rise materially. At some point rising interest rates would become bullish for precious metals and bearish for the stock market. Moreover, if interest rates cannot effectively be managed downward, then that would be even more bullish for precious metals and bearish for conventional assets like bonds and stocks.