Hoye sees gold stocks shining in upcoming post-bubble contraction
Market historian Bob Hoye from ChartsandMarkets.com is looking for a dismal low in crude somewhere around late December or early January. Meanwhile, he soon expects the onset of a post-bubble contraction which should prime gold stocks for good times. In a fascinating interview with Jim Goddard, he explains his outlook which is based on historical, seasonal and technical work.
For crude, a bounce from Friday's big sell-off is quite possible, but he remains leery:
At some point here it may pop a relief rally for while but I wouldn't go near the product or the stocks until it actually bottoms.
Meanwhile, Hoye explains that industrial commodities were friendly for the bull market out to May or June. Now, they may be signalling global recession:
If it is a recession, it could be a severe one. Because what history has recorded is a great financial bubble, huge mania or buying frenzy, whatever you want to call it, they are followed by post-bubble contractions.
A rising market has been promoting leverage, explains Hoye. But, when the prices stop the latest buyers are offside and forced out.
During a boom bull market, everything is positive, and people believe that the skills of the central bankers are helping...they are there to backstop, nothing can go wrong, which adds to the degree of speculation.
Once prices stop, the power shifts from the central bankers to the margin clerks. Hoye paints a picture of the market moving from a period that was juiced by central bank intervention to one that will now be dominated by margin calls coming due. This is when the theory of central banking can be exposed as a failure:
There have been 18 recessions since the Fed opened its doors in January 1914. The theory was attractive, but the results are not.
However, don't expect common sense to spell the end of the modern-day central banker. Hoye expects that if the post contraction gets severe, the central bankers will be saying they prevented it from getting worse. Nevertheless, he notes that price declines are currently the order of day:
There is so much imaginary stuff out there and the market is quite an implacable adjudicator on imagination and prices are being marked down.
Hoye, who has not been bullish on gold stocks recently and remains cautious in the short-term, now believes global developments are finally starting to set the stage for a bull market in gold stocks:
In a post-bubble contraction, the gold miners have had very good times in the past, and this is ahead of us.
However, he believes it wil be hard to get performance out of gold stocks until financial pressures ease. That could happen any time, maybe some time in January. Consequently, he is looking forward to a new bull market for the gold group, maybe starting something in the New Year.