Fed week is exciting for some. Gold bulls and bugs alike hope the Fed will do something or say something that will trigger a huge move in precious metals. It doesn’t work like that. The Fed follows the market, which for the Fed Funds rate (FFR) is the 2-year yield. The 2-year yield has been screaming higher over the past 12 months and it implies at least another two rate hikes in the future. That’s not good for precious metals and could be partly why (among other reasons) Gold and gold stocks have lost their 200-day moving averages. Whatever the reason, the short-term technicals are negative and there is risk of increased selling before a potential rebound in July.
First, let’s take a look at Gold and gold against the equity market. As we can see from the chart, Gold in June has failed twice at its 200-day moving average. That is different from 2017 when each time Gold lost its 200-day moving average, it made a V rebound back above it.
Gold’s weakness against the broad equity market is another concern. At the bottom of the chart we plot Gold against the NYSE, a broad stock market index. The ratio recently failed at its downtrending 200-day moving average and is also threatening a move to new lows for essentially the first time since 2015. (The December 2017 break was not sustained to the downside).
Elsewhere, the miners have spent the second quarter wrestling with their 200-day moving averages. GDX failed at its 200-dma twice in the past month, including last week. Meanwhile, GDXJ has shown a tiny bit more strength but essentially has wrestled with its 200-dma since April. The silver stocks (SIL) have been weaker as they have not traded above their 200-dma since January and could have started to breakdown on Friday by closing at 3-month low.
The immediate outlook for precious metals is negative as the price action suggests but current bearish sentiment implies a rebound is on the horizon. The summer could be playing out as we anticipated three weeks ago. An immediate move lower could push Gold to strong support around $1260 and that would put sentiment indicators into truly extreme territory. From there, it is critical that the sector recaptures 200-day moving averages. Given our recent cautious views, we have narrowed our focus to a smaller group of companies capable of performing well in this environment. To follow our guidance and learn our favorite juniors for the next 6 to 12 months, consider learning about our premium service.
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Last week we discussed the fundamentals of Gold, which do not appear bullish at the moment. Real rates (and yields) are rising and investment demand for Gold is flat. That in itself is a temporary but big missing link. However, we are referring to the missing link in the context of intermarket analysis. Gold is an asset that performs best when its outperforming its competitors. That’s true of any asset but especially Gold because it traditionally has been a counter-investment or an anti-investment. While Gold is firmly outperforming Bonds and showing strength against global currencies, it remains neutral to weak against global equities.
First, let’s take a look at Gold relative to foreign currencies (FC) and Bonds. At its 2016 peak, Gold/FC had already retraced the majority of its bear market. Last week Gold/FC managed to close at an 8-month high even as the US$ index rebounded. Gold has performed even better against Bonds and that includes dividends. A few months ago Gold relative to the major Bond ETFs (TLT and IEF) made a 3-year high. Those ratios remain above rising 200-day moving averages.
It’s important for Gold to outperform foreign currencies because if Gold is only rising because of a weak US Dollar that represents a bear market in the dollar rather than a bull market in Gold.
Gold’s outperformance against Bonds is significant because Bonds represent an enormous capital market and Bonds are in some ways the antithesis of Gold.
Unfortunately, Gold has not been able to breakout in nominal terms and from an intermarket perspective, that is because of the strength in the stock market. The ratios below show that Gold relative to global equities is trading not too far above the 2015 lows. If these ratios retested their 2015 lows they’d be trading around 10-year lows!
Gold vs. global equities
Gold appears to have lost the 200-day moving average relative to global equity markets but if it can maintain its outperformance against Bonds and foreign currencies then it will be setup for a powerful move when it can break to the upside relative to equities. The negative is that change does not appear imminent but the positive is when it happens Gold should begin a major leg higher. In the meantime, we continue to focus on and accumulate the juniors that have 300% to 500% return potential over the next 12 to 18 months. To follow our guidance and learn our favorite juniors for the balance of 2018, consider learning more about our premium service.
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|Lincoln Minerals Limited