It’s been a rough year thus far for precious metals investors, with gold (GLD) down nearly 6% year-to-date, massively underperforming the S&P-500 (SPY). This significant underperformance is despite a strong backdrop for the metal, with negative real rates deep in negative territory with inflation readings sitting at their highest levels in decades.
However, while the lagging returns certainly don’t inspire much confidence, it’s important to note that the long-term picture for gold has rarely looked better. Meanwhile, miners like Agnico Eagle Mines (AEM) are trading at some of their most attractive valuations since the March 2020 lows, and before that, the Q3 2018 cyclical bear market trough. Let’s take a closer look below:
(Source: YCharts.com, Author’s Chart)
One of the best indicators for gold’s future performance is real rates, and as the chart above, real rates continue to plunge, sitting at a reading below (-) 6%, which are some of the lowest readings we’ve seen in decades. Negative real rates provide a solid backdrop for gold because there’s no opportunity cost to hold the metal. Unfortunately, though, we haven’t seen the improved fundamental picture translate into any upside for the gold price, which can partially be explained by last year’s rally above $2,050/oz.
(Source: TC2000.com)
While this advance to new all-time highs for gold was bullish for the big picture, it contributed to readings of extreme optimism, with this being the most optimism investors had been regarding gold since 2011. Periods of extreme optimism require time to wring the excess out of the market, and this is exactly what we’ve seen from gold, evidenced by a nearly 20% correction over 16 months.
The good news is that while this correction has been violent, it hasn’t done any technical damage. Plus, it’s been a long enough correction that it’s reset all of gold’s oscillators from overbought to oversold. This supports a multi-month or even multi-year rally when the metal finally exits this correction. If we combine this with the strong fundamental outlook, 2022 should be a much better year for the metal.
So, what’s the best course of action?
Looking at gold’s daily chart below, we can see that the metal has a strong support area between $1,740/oz – $1,760/oz, with this being the area where gold would back-test its ~1.5-year downtrend line from its August 2020 highs. As we saw in early November, the first test of this downtrend line was immediately bought up, and I would expect this to occur if we see a re-test of this $1,760/oz level. So, for investors looking to add gold exposure to their portfolio, the $1,740/oz to $1,760/oz level looks to be the lowest-risk spot to start a position or add exposure. Currently, I remain long GLD with an average cost of $1,550/oz.
(Source: TC2000.com)
For investors looking for more torque vs. the metal, one of the most attractive gold producers sector-wide remains on sale, with Agnico Eagle Mines dropping down to test a multi-decade uptrend line off of its 1998 lows. Fundamentally, the stock is the cheapest it’s been in years, trading at less than 1.0x P/NAV following a merger with Kirkland Lake Gold. Given the stock’s positive fundamental and technical outlook, with AEM having a mix of growth and industry-leading margins, I see this pullback below $49.00 as a gift. In summary, I see AEM as the best way to play the gold price, but for investors that prefer the metal, a dip to $1,760/oz would present a low-risk buying opportunity.
(Source: TC2000.com)
Disclosure: I am long GLD, AEM
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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