It’s been a tough past year for investors in the precious metals space, with gold (GLD) down 13% from its Q3 2020 highs and down over 5% for the year. Normally, this wouldn’t be all that disappointing for a volatile asset like gold, especially after an impressive year in 2020.
However, it hasn’t so much been the correction that’s frustrating, but the violent pullback in mining stocks and the fact that every other asset class has been in a relentless uptrend. This opportunity cost has contributed to the worst sentiment we’ve seen in gold since 2018, despite the metal sitting roughly10% shy of all-time highs vs. near 1-year lows in Q3 2018. Let’s take a closer look below:
(Source: Daily Sentiment Index, Author’s Chart)
As shown in the chart above, bullish sentiment for gold touched its lowest levels in more than three years in October, recording multiple readings below 20% bulls on a daily closing basis and seeing its moving average drop towards 20%. This means that for the trailing 100-day period, there were nearly three market participants that were bearish for every one market participant that was bullish, a setup we haven’t seen since Q3 2018.
The major difference in the setup this time around, though, is that gold has been sitting within 10% of its all-time highs, just came off a new all-time high last year, and real rates are firmly in negative territory.
In Q3 2018, real rates were 500 basis points higher (less favorable for gold), the metal was testing new 1-year lows, and it was nowhere near new all-time highs. Therefore, this depressing reading in Q3 2018 made sense, given that the metal had been a terrible performer on a trailing 2-year basis (Q3 2016 – Q3 2018), and it was not yet clear whether the 2015/2016 lows would be re-tested near $1,070/oz.
(Source: TC2000.com)
Given the much more bullish backdrop this time around with a positive 2-year return, and the metal making new all-time highs roughly 12 months prior, the fact that we hit these depressed levels is actually a very bullish contrarian signal.
The good news is that since hitting this sentiment reading, gold has begun to find its footing, and it seems like there’s a very good chance that the $1,670/oz low in March and re-test in August may have been the bottom. Meanwhile, even though gold’s technical chart has been a complete mess the past year, with a shallow cyclical bear market, the long-term picture has rarely looked better.
Looking at gold’s quarterly chart below, we can see that the metal is building a massive saucer with handle base, and its arc is now beginning to catch up to the price. It’s also worth noting that the violent correction and erratic trading of the past 18 months is hardly captured in the quarterly chart, with gold building a relatively tight consolidation pattern that is entirely normal after nine straight quarterly advances heading into Q4 2020.
So, while many investors remain bearish and some have gone as far as to proclaim gold dead, gold still looks alive and well and has one of the best-looking charts among major asset classes. This is because, unlike other assets that are extended after near parabolic 2-year runs, gold looks to be building a launchpad for new highs.
(Source: TC2000.com)
So, what’s the best course of action?
Gold continues to have strong support between $1,720/oz to $1,750/oz, and I would expect any pullbacks towards this zone to provide low-risk buying opportunities. Assuming the metal can hold the important $1,670/oz level going forward, I would not be surprised to see the metal trade above $2,250/oz in the next 18 months.
This would likely translate to more than 50% upside in many gold miners, which are trading at their lowest valuations since the March 2020 lows after suffering a brutal bear market since August 2020. In summary, I continue to remain bullish on both medium-term and long-term, and my favored way to play the metal is with either GLD or Agnico Eagle Mines (AEM).
Disclosure: I am long GLD
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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