Gold Plunges Despite Bullish Catalyts

It’s been a rough start to 2021 for the gold (GLD) bulls despite a Blue Wave in the United States that is likely to keep stimulus high for the next two years and the appointment of a former dove, Janet Yellen, as Treasury Secretary.

This continued underperformance Is likely extremely frustrating for the bull camp, with several discussions of the markets being rigged, manipulated, and metals being unfairly suppressed in every possible manner. There’s no debating that games are played occasionally, but it’s important to note that the pattern gold is building is not unusual, whether it’s the result of manipulation or not.

This is because asset classes often re-test their multi-year breakout levels after hitting new all-time highs, and this is typically the last chance to get great entries before the more exciting middle and late innings of a new bull market. So, while it might be easier to cry manipulation, it makes more sense to embrace the manipulation and start positions while the asset class is hated because this won’t last forever. Let’s take a closer look below:

(Source: TC2000.com)

As shown in the chart above, gold broke out to a new all-time high in Q3 2020 and has been trading in a choppy range since, with a 15% correction from its highs. However, while this correction has been treacherous to those focused on short-term time frames, we haven’t seen any real technical damage to date for gold, with the metal looking like it’s building a handle to its large 10-year cup base.

This is quite normal after a near 80% advance like we saw since the 2018 low ($1,150/oz), but the key is that this correction does not break below the rising quarterly moving average. Currently, the quarterly moving average comes in near $1,680/oz, and a break below here would be a bearish development. As we can see, the metal broke below this key moving average on a quarterly basis a year after the previous bull market (2002-2011), and this led to a sharp decline and multi-year market in gold.

Therefore, as long as $1,680/oz is defended on a monthly closing basis, the trend is the bull’s friend here. Having said that, I would prefer to see gold hold above $1,760/oz to rule out the potential of a test of this key moving average.

(Source: TC2000.com)

If we look at the sentiment below, we can see that the bulls are quite despondent, with bullish sentiment below 50% even though gold was up more than 24% last year. In fact, gold outperformed the S&P-500 (SPY) last year yet entered 2021 with a sentiment reading of barely 25% bulls vs. S&P-500 sentiment of closer to 80% bulls.

This is great news for investors looking for a contrarian trade because the best time to buy is when an asset class is hated but still in a long-term uptrend. Ideally, I would like to see bullish sentiment fall back below 25% bulls, which would likely require a test of the $1,750/oz to $1,760/oz level. However, with the multi-month moving average for sentiment below 40% bulls, we already have conditions in place for a durable bottom to this correction. So, while the correction may not be over just yet, I would argue that the worst of it is certainly over from a price standpoint.

(Source: Daily Sentiment Index Data, Author’s Chart)

So, what’s the best course of action?

I continue to see owning Tier-1 jurisdiction gold producers as the best way to playing the gold trade, with the two most attractive names being Alamos Gold (AGI) and Kirkland Lake Gold (KL). Both companies pay 1.25% plus dividends, are trading at less than 10x FY2021 annual EPS estimates, and have significant net cash positions, giving them the flexibility to increase their dividends and do share buybacks. Both companies currently have 5% share buyback programs in place and have a history of supporting their share price on deep pullbacks. For those that prefer to own the metal, I would view any pullbacks below $1,750/oz as low-risk buying opportunities, with risk clearly defined on any monthly close below $1,680/oz.

(Source: Author’s Chart, Kirkland Lake Gold Company Filings)

This multi-month correction has understandably battered sentiment in the sector, but with gold producers trading at their lowest price to earnings and price to free cash flow ratios since their 2015 lows, I see this as a time to begin starting new positions in the best names. Therefore, I have added to my KL and AGI positions this week, and I may look to add to my position in gold if we see further weakness and more of a wash-out in sentiment.

Disclosure: I am long GLD, KL, AGI

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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The SPDR Gold Shares (GLD) was trading at $167.81 per share on Thursday afternoon, down $4.04 (-2.35%). Year-to-date, GLD has declined -5.92%, versus a 2.94% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #16 of 35 ETFs in the Precious Metals ETFs category.