Looking for a Major Bottom in Gold
Shayne and I do not believe that the weakness in Gold and gold mining stocks is over, the outlook is that another Southside leg getting underway.
Should that happen, we are positioned to profit from it.
Long-term investors, traders, and speculators should be aware of the near term trends, but they should also be aware of the conditions that will lead to a shift from a Bear market to a Bull market.
There are a number factors that precede major bottoms in precious metals, here are 5 of them, as follows:
- Gold Outperforms the Stock Market: Other than in Y’s 1985 through 1987, there has never been a real Bull market in Gold without it outperforming the stock market. A weak stock market usually coincides with conditions that are favorable for precious metals. That means high inflation or economic weakness that induces policy that is usually Bullish for the precious Yellow metal. The 2016-2017 frame failed to be a Bull market because the stock market continued to outperform Gold. Note: the Gold to Stocks ratio bottomed just before the Y 2001 and 2008 bottoms.
- Gold Outperforms Foreign Currencies: Gold outperforming foreign currencies is usually happens while the USD is in an uptrend. It signals relative strength in Gold and shows that Gold is not being capped by the strong USD. It also can signal a coming peak in USD. Gold was outperforming foreign currencies prior to Y’s 2001, 2008 and late 2015 bottoms. There are currently no positive divergences occurring.
- Major Peak in USD: This does not precede bottoms in Gold, it is a lagging indicator. Gold will not start a major Bull market without a corresponding peak in USD. These 2 elements can rise at the same time and for months. But, is hard to imagine a long term Bull market in Gold without a corresponding peak in USD. Highs in Y’s1993 and 2016 led to brief Bull runs in Gold but they were not like the peaks in Y’s 1985 and 2001.
- Gold Mining Stocks Crash: A mining stock crash not a ‘must have’ component of major bottoms, but it is something that can happen before a major bottom. Note: gold mining stocks crashed to their late Y’s 2000 and late 2008 lows. They also crashed into their Summer 2015 low, which was not the final low for the sector, but was for the senior gold miners. The Key point is that if gold mining stocks fall that deep again it may be the sign that a bottom is just ahead.
- Fed Policy Change: Over the past 60 years, gold stocks have often bottomed immediately after the high in the fed funds rate. In 10 of 12 rate cut cycles, gold stocks bottomed a median of 1 month and an average of 2 months after the peak in the . That policy rate, and the average gain of gold stocks following that low was 185%. And there are points where the gold stocks declined during a period of rate cuts or no Fed activity. Bottoms then were sometimes followed by the start of Fed hikes.
- The Take Away: Given the current conditions, we see gold and gold stocks bottoming immediately after the Fed’s final rate hike for this cycle, when it comes to 3.00 – 3.25% sometime in Y 2019 or early Y 2020.
Now, you know what to look for that signals professionals that a major bottom in gold is just ahead.
Notably: Tuesday we learned that Ray Dalio’s Bridgewater Associates maintained its holdings in SPDR Gold Shares (GLD), the largest bullion-backed ETF, at 3.9-M/shares, and its stake in iShares Gold Trust(IAU), the 2nd-largest, at 11.3-M/shares in Q-3, according to a regulatory filing Tuesday.
Bridgewater stayed loyal to bullion even during an investor sell-off that sent assets in bullion-backed ETFs falling the 1st decliner since the end of Y 2016. The precious Yellow metal’s haven appeal has flagged, as USD rallied and borrowing costs rose in the US, making non-interest bearing assets less competitive.