Gold Shines Eventually

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Includes: BAR, GDX, GDXJ, GLD, IAU, SIL
by: Paul Wong
Summary

Gold and silver offer good potential with rate cuts expected by year end.

Gold is the ultimate global risk-off asset as capital and central bank reserves seek safety.

Both gold and silver miners have more upside if gold rises to the 2016 high.

Introduction

The recent rise in gold price for the past month is the result of the alignment of positive major factors, such as falling interest rates, stocks, and the US dollar. Flight to safety is becoming the new theme as global conflicts heat up.

This article intends to discuss the outlook of gold for the next 2 months and beyond, by way of the updates of the charts that I developed in previous articles.

Gold vs. Fiat Monetary System

The diagram above is a view to relate gold to the fiat monetary system during times of financial stress. With excessive expansion of total debts that cannot be paid back, erosion of confidence in the faith-based fiat system will drive people towards gold (as indicated by the accumulation trend of many central banks in the past few years).

Dollar Value Analysis of Gold

The US Dollar Index (NYSEARCA:UUP) is a measure of the value of the US dollar relative to a basket of foreign currencies. The dollar value of an asset is simply the product of the asset with UUP (UUP*Asset or $Asset).

The following chart shows the inverse relationship between dollar index and gold (NYSEARCA:GLD), in light blue and gold color. The dollar index has shown some weakness recently due largely to the reverse attitude of the Fed. Since the last rate hike with quantitative tightening (QT) in December, the Fed has announced no more rate hikes, then less quantitative tightening, and then rate cuts likely before the year end. The complete change of tone by the Fed is hugely important because it is the last of the central banks that are marching towards the next round of global quantitative easing. The renewed pace of easing will propel gold much higher.

Gold holds value and is a good indicator of inflation over time. The chart below shows that gold has been rising at 5-7% per year since the low in 2016, better than bonds and arguably safer. The sudden rise of gold for the past 2 weeks is encouraging. A repeat of gold price rising to the 2016 high of $1,376 is within reach for the next 2 months.

The gold market is global. The following chart is used to track the trends of the dollar, gold, and dollar gold (UUP*GLD). Dollar gold, in brown, is the ‘real’ or ‘global’ gold value and has performed better than gold since October, showing the superior real value of gold internationally. Dollar gold actually broke above the 07/2016 high already, the first time in the past 3 years. The underlying message may be that the global gold demand or interest is picking up.

Long-Term Treasuries vs. Gold

The chart below illustrates the relationship between long-term bonds in green, the US dollar in light blue, and gold. As the Fed is becoming more dovish, long-term-bonds rose since December. And lately, gold reversed the last slide since February and is rising fast. Both bonds and gold are favorites to be safer than stocks during times of uncertainty.

Stock vs. Gold

The increase of gold prices and some macroeconomic inputs such as interest rates, oil prices and the US dollar value, all of which can lower corporate earnings, are usually negative for stocks. A composite of the inverse of the above inputs plus gold can track the macro conditions, and potentially serve as a leading indicator for stocks.

The composite appears to be quite adequate in showing the deteriorating macro conditions before the last 3 stock drops. While this concept of tracking the conditions of the market by way of a composite seems encouraging, more research is needed to find the best correlation formula and weight for each input.

The 48-month chart below tracks the performance of the Dollar Index in light blue, gold and the dollar S&P 500 (UUP * SPY or $SPY) in beige. $SPY shows the real or global valuation of the US stock market, which peaked on May 3. With the falling dollar due to the weight of budget and trade deficits, plus the Fed’s dovish tone and with the reductions in GDP and earnings growth, it is unlikely that $SPY will make any new high for the next 6 months.

The near record stock market is actually vulnerable to a flash crash similar to August 24, 2015, depending on the occurrence of some negative future events. $SPY may show a clue prior to the next flash crash by the declines in both SPY and UUP for a number of days.

The 48-month chart below shows SPY/gold (in the light green color) reached a peak in October 2018. The lower peak in May shows the strength of gold as stocks face many obstacles ahead.

Gold and miners

The rapid rise in gold price is amplifying the performance of the miners these past 2 weeks. The miners are much lower than the previous high level in July 2016. Therefore, the upside for miners is large for the next 6 months if gold continues to head higher.

Silver miners lagged gold miners badly and are at a depressed level now. The upside potential of silver miners is larger than gold miners if silver follows gold upward.

Dollar silver or $SLV, UUP*SLV, in light green is the real or global value of silver. $SLV is higher than SLV or silver because of the strength of the dollar since last August . The outlook of silver price appears to be good due to silver being severely undervalued.

Conclusions

The latest dovish signals from all major central banks, reduction in bank reserves percentage, interest rate cuts, and more quantitative easing are bullish for gold. If stocks fall, in response to the reduction of earnings growth plus the anxiety from escalations of geopolitical disagreement, gold will be the winner. My long-term target for gold is $2100 by 2021 as I stated before. The latest actions by central banks reinforce the viability of this target.

Disclosure: I am/we are long GDX, SIL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.