Dear Professor Lewis,

I just read your article on gold going into backwardation. As always, your explanation makes sense and is easy to understand.

I'm confused, however, by the disconnect that gold stocks have shown lately in relation to gold itself. The stocks seem to want to move with the market, instead of following gold's upward trend. If I'm right in this observation, what, in your opinion would change this pattern?

Regards,
Minyan K

Dear Minyan K,

Yes, the gold shares have clearly had a tie to the equity market over the past 4 months. However, you will note that, during this latest decline in November, gold stocks (via the GDX) didn't take out their October lows like nearly every other sector index did (e.g. the XOI, XNG, and UTIL).

In fact, the GDX didn't even revisit those October lows on this latest decline. That's a significant departure from the action of September and October, when the golds (and the oils) led the S&Ps down as a result of the corresponding squeeze in the dollar.

I read that renewed relative strength in hard-asset plays as more evidence that the upside squeeze in the dollar is now ending. If so, then the entire equity market is likely to see a sizeable bear-market rally as the dollar collapses, to reverse much of the squeeze-related rally that's occurred since July against the major currencies. Such a slide in the dollar vs. other confetti will help to lift the multinationals, oils, commodity stocks, etc.

So, in a sense the gold stocks will continue to trade with the broader market.

However, whereas the broad market is only likely to see a big bear-market rally, the stocks that will outperform and continue on in a bull market will be those that benefit from a resumption of the global inflationary trend (see Gold Outperforms...Everything) that's been in place since 2000 ( but i'd stick to the ones that are less GDP-sensitive in the near term, like the golds, because they will outperform).

Ironically, this is also occurring just in time for the herd to have positioned themselves for dollar "deflation" in T-bonds (just as Time magazine and other mainstream magazines have told them to do over the past couple months).

Or at least, that's the way I see things, but I've been wrong for 3 or 4 months. So what do I know?