It’s been another rough month for the precious metals sector, with the Palladium ETF (PALL) diving 24%, silver (SLV) down 6%, and gold (GLD) sliding by more than 4%. This has taken yet another bite out of the Gold Miners Index (GDX), which is now down 9% for the month, and 18% year-to-date. While this continued weakness is quite disheartening for investors, especially with other assets up sharply year-to-date, there are two silver linings. The first is that the big picture for gold continues to remain bullish if the metal can stay above $1,670/oz on a monthly closing basis. The second is that sentiment remains in the gutter for gold, with the metal decimated over the last year, and the below indicator is finally nearing a short-term buy signal. Let’s take a closer look below:
(Source: Daily Sentiment Index Data, Author’s Chart)
As shown in the chart above, bullish sentiment for gold has not been this depressed in more than two years, with the long-term moving average for bullish sentiment plummeting to 23% vs. 30% in April 2021 and 18% in September 2018. In the past decade, we’ve only seen eight dips into this extreme pessimism zone, with all of them followed up by strong forward returns for the metal. Following the most recent case (September 2018), gold was up more than 11% in the next six months and 29% in the following 12 months with minimal drawdown. The previous instance was January 2017, with gold climbing 8% in the next six months and nearly 14% over the next 12 months.
This averages out to a forward 12-month return of more than 21% over the following 12 months, with an average 12-month forward drawdown of less than 5%. Assuming this were to play out similarly, and assuming gold moves onto a short-term sentiment buy signal, this would suggest that gold’s downside would be ~$1,650/oz from current levels, with an upside of $2,100/oz, translating to an exceptional reward/risk ratio. Obviously, there are no guarantees this plays out like the past two instances, but I would argue that the hatred for the metal here is a great sign past on past precedents.
Looking at the technical picture, it’s no surprise that many investors have turned bearish, with a clear pattern of lower highs and lower lows for gold since Q3 2020. Currently, gold is stuck just below its downtrend line from these Q3 2020 highs and will need to move back above $1,800/oz to confirm this pattern is changing and regain upside momentum. However, while it’s hard to be overly optimistic based on the daily chart, the monthly chart, which holds much more weight, remains intact. This is because gold continues to build out a massive 10-year base and has still not invalidated this breakout, despite the nearly 20% correction.
(Source: TC2000.com)
(Source: TC2000.com)
Looking at the monthly chart above, we can see that despite the higher low (thus far) vs. the March lows ($1,730/oz vs. $1,670/oz), sentiment is much more pessimistic, which is what investors want to see on a re-test or near re-test of a pivotal low. Meanwhile, we have a very clear uptrend on gold’s long-term chart, with higher lows over the past several years, a massive 10-year breakout above $1,765/oz (previous monthly resistance), and only a recent pattern of lower highs. This pattern of lower highs could be resolved with a break back above $1,800/oz, so how gold acts over the next couple of months will be important. However, as long as the gold price can stay above $1,670/oz on a monthly close, I see no reason to lose sight of the forest for the trees here. Instead, I believe there’s justification for remaining long-term bullish here, and I would view any dips below $1,705/oz as a low-risk area to add to positions in the metal, with a stop below $1,640/oz, which would invalidate the cup & handle pattern.
So, what’s the best course of action?
While I see a solid reward/risk picture for the gold price due to depressed sentiment on a near re-test of the recent lows, I see even better reward/risk in miners, with Newmont (NEM) being one name that is very reasonably valued. At a current share price of $54.00, the stock trades at less than 14x next year’s earnings and pays a dividend yield of more than 4.00%, making it one of the highest-yielding stocks in the S&P-500. The stock also trades at only slightly above 1.1x P/NAV vs. a historical multiple closer to 1.5x. Therefore, the stock offers material upside if gold can regain its momentum, with a fair value for the stock closer to $79.00. So, while gold offers upside as well, NEM is paying investors to wait, and I would argue it has even more upside. Having said that, if I preferred to play the metal, I would be looking to start a position on any dips below $1,705/oz. For now, I remain long both gold and NEM, with an average cost on gold of closer to $1,550/oz.
Disclosure: I am long GLD, NEM
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.