Seeking Alpha

Gold Still Outshines Its Competitors

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Includes: DGL, DGLD, DGP, DGZ, DZZ, FXY, GDX, GLD, GLDI, GLL, IAU, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Clif Droke
Summary

Lower global growth forecasts bode well for gold's intermediate trend.

5-year TIPs yield is falling again, which also supports higher gold prices.

Gold bolstered by relative strength versus U.S. equities and the yen.

Despite a September pullback, gold is still highly esteemed in the minds of investors. This can be seen by the metal’s performance when compared against some of its closest competitors, including the U.S. stock market and the Japanese yen. As I’ll show here, gold and its sister metal silver are poised to rebound in Q4 2019 on the back of strong safety demand.

Gold’s latest bull market began a year ago, and despite the corrective dip in its price last month there are no signs that the bulls have lost control of the metal’s price trend. Not only is gold buoyed by the persistence of worries over the global trade outlook, but macro events are also supportive of its long-term bull market.

Consider that the Organization for Economic Co-operation and Development (OECD) recently cut its global growth forecast from 3.3% to 2.9% for 2019, and from 3.4% to 3.0% in 2020. If realized these would be the lowest yearly growth rates since the 2008-09 credit crisis. The OECD also noted that risks to the global economy are mounting, including the potential impacts of U.S.-China trade tensions and a no-deal Brexit.

Another factor which has had an outsized impact on gold’s performance is the continued weakness in real interest rates. As we talked about in an earlier report, the gold price tends to move inversely to the yields on inflation-protected Treasury securities, or TIPs. Shown here is the performance of the 5-year TIPs yield in just the last month. The rally in the TIPs yield in early September coincided with the gold price pullback as investors fled the safety of the bond market, temporarily driving yields higher. Higher yields also make non-yielding bullion less attractive to investors.

Source: Treasury Department

However, the TIPs yield has since fallen back and continues to sag. The drop in the TIPs yield reflects a favorable interest rate backdrop from which gold can eventually launch a renewed rally this fall.

The intensity of investors’ concerns over the global economic and inflation outlook cannot be underestimated. It’s the main reason why gold has performed so well this year despite a persistently strengthening U.S. dollar index. Indeed, gold’s “fear factor” is the primary reason for its 1-year-old bull market. And with the demand for safe havens still strong among the world’s retail investors, the intermediate-term (3-6 month) gold price outlook is still bullish.

Another indication of just how keen investors are to own gold right now is the latest data from the CFTC. Below is a chart which underscores the all-time high in gold long positions, which includes futures trading positions and ETF holdings. As you can see here, gold holdings among position traders recently hit an all-time high. Gold’s September price pullback did little to dent the demand for gold, thus the metal’s outlook remains optimistic in the coming months.

CFTC and ETF Gold Holdings Source: Sprott

Also supportive of gold’s intermediate-term upward trend going forward is gold’s relative strength versus the S&P 500 Index (SPX). This particular ratio, shown below, is a favorite tool of institutional traders who typically view gold as worth owning when it’s consistently outperforming equities. This has clearly been the case in recent months, which argues in favor of support for gold on the institutional front.

Gold vs. S&P 500 Index Source: BigCharts

Moreover, compared with other popular safe havens – namely the Japanese yen – gold is also outperforming on a relative strength basis. The graph below shows gold’s price strength when compared against the Invesco Currency Shares Japanese Yen Trust (FXY). Thus, gold is in a decisively bullish relative strength position right now against many of its biggest competitors.

Gold vs. Japanese Yen ETF Source: StockCharts

While gold should continue to benefit from the prevailing climate of economic and political uncertainties, its sister metal silver has been largely ignored by investors. Long derided as being more an industrial metal as a precious one, silver has often taken a back seat to gold in recent years. Yet if the latest readings in the gold-to-silver ratio are any indication, that should soon change.

Gold-to-Silver Ratio Source: StockCharts

In July, the gold/silver ratio hit almost the 95.00 level, which was its highest reading since 1991. The high ratio reading earlier this summer was a hugely bullish sign for silver, which then promptly broke out of a 5-month slump and rallied to its highest level since 2016. While the gold/silver ratio hasn’t returned to its July peak, it has returned to the same levels it saw a year ago when the latest gold and silver bull market first commenced. For this reason, investors should expect silver prices to follow gold higher in the coming months.

Although gold remains sensitive to the U.S. dollar exchange rate, the metal’s price has been far more sensitive to investors’ fears over the global economy’s health this year. With the U.S.-China trade war and Brexit-related worries not likely to diminish anytime soon, its safety bid looks secure for the balance of 2019. The macroeconomic and relative strength factors mentioned above also argue in favor of the bullish case for gold. Silver, too, is in a position to benefit from gold’s safety-related demand based on a more favorable reading int the gold/silver ratio. Investors are therefore justified in maintaining longer-term investment positions in both metals.

On a strategic note, I’m waiting for both the gold price and the gold mining stocks to confirm a breakout before initiating a new trading position in the VanEck Vectors Gold Miners ETF (GDX), my preferred trading vehicle for the gold mining stocks. I’m currently in a cash position in my short-term trading portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.