John Hussman, whose weekly market comments are a must read, wrote a piece back in 1999 entitled Going For the Gold, see here. In it he described the set of circumstances that are present during periods of gold stock strength.
There are 4 items that when are all present have historically resulted in an amazing 123% annualized return for the XAU gold stock index.
Those items are:
1) The rate of inflation is higher than 6
Check: 3.57% vs. 1.14% according to this website:
2) Treasury bond yields are lower than 6 months earlier
Check: 30 yr 4.39% vs 4.55% See here:
3) the NAPM Purchasing Managers Index is below 50,
Not yet: currently at 55.3 See here:
and 4) the Gold/XAU
ratio is above 4.0.
Check: currently 7.89 See here:
Three of the 4 items are present with the 4th being reasonably close and except for this past month in a downward trend.
John Hussman has taken an 18% long gold stock position out of a possible 30% in his bond fund. I own shares in his other two funds HSGFX and HSIEX, but not his bond fund. I bought a few shares of HL and some HL calls as a speculative trade.
For more on Gold, the Federal Reserve, and the Austrian Business cycle see my recent post:
Big time trouble dead ahead thanks to the Federal Reserve.