TheDailyGold Premium Update #599

The 26-page update was published and emailed to subscribers late Saturday night.

The update includes a report on one of our holdings which we took a profit on in the summer. The stock has corrected quite a bit but now there are many reasons its a buy. We think it has a chance to pop over the next few months.

We also analyze the sector and the immediate driving forces.

This was one of our best updates.

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Is an Inverted Yield Curve Bullish for Gold?

In recent days we’ve seen the beginnings of an inversion in the yield curve.

The 2-year yield and the 5-year yield have inverted but not yet the the 2-year yield and the 10-year yield, the curve that is watched most. However, “2s and 10s” as bond traders would say appear headed for an inversion very soon.

We know that an inversion of the yield curve precedes a recession and bear market. That is good for Gold. But timing is important and the key word is precedes.

In order to analyze the consequences for Gold we should consult history.

First let’s take a look at the 1950-1980 period.

In the chart below we plot the Barron’s Gold Mining Index (BGMI), Gold, the Fed funds rate (FFR) and the difference between the 10-year yield and the FFR (as a proxy for the yield curve).

The six vertical lines highlight peaks in the FFR and troughs in the yield curve (YC), which begins to steepen when the market discounts the start of rate cuts. A steepening YC is and has been bullish for Gold except when it’s preceded by inflation or a big run in Gold.

 

Note that five of the six lines also mark a recession except in 1966-1967.

At present, the yield curve is on the cusp of inverting for only the third time since 1990.

The previous two inversions in 2000 and 2007 were soon followed by a steepening curve as the market sensed a shift in Fed policy.

The initial rate cut in 2000 marked an epic low in the gold stocks and the start of Gold strongly outperforming the stock market. In summer of 2007 the rate cuts began and precious metals embarked on another impulsive advance.

The historical inversions carry a different context but the takeaways are not so different.

Aside from the mid 1970s to the early 1980s, we find that a steepening of the curve (which accelerates from the start of Fed rate cuts) is bullish for precious metals. (This also includes a steepening in late 1984 that preceded the bull market in the mid 1980s).

With that said, the inversion itself is not bullish for precious metals because there can be a lag from then to the first rate cut and steepening of the curve.

I took a careful look at four of the previous inversions and counted the time from that point to the next significant low in gold stocks. The average and median time of those four is 10 months.

That appears to be inline with my thinking that the Federal Reserve’s final rate hike will be sometime in 2019.

In the meantime, precious metals are rallying but the inversion of the yield curve and Fed policy argue it would not be wise to chase this strength. There will be plenty of time to get into cheap juniors that can triple and quadruple once things really get going. To prepare yourself for an epic buying opportunity in junior gold and …read more

Gold Fundamentals Improving but Not Bullish Yet

Recent market and economic developments are positive for Gold and precious metals but conditions are not bullish yet.

Bullish conditions and bullish fundamentals would be highlighted by a shift in Fed policy. They aren’t shifting yet. They are slowing, which precedes a shift.  

From a market standpoint, we need to see strength in Gold in real terms (against stocks and foreign currencies) and a steepening of the yield curve. These developments along with shifting Fed policy will tell us a new bull market is soon to begin.

In regards to Gold against equities, the chart below shows both progress but the need for more strength.

Gold remains below its long-term moving average against US Stocks (NYSE). The trend has not turned bullish yet.

Gold relative to the rest of the world (US excluded) and Emerging Markets has turned the corner but now must prove it can hold above the long-term moving average.

Gold vs. Global Equities

Gold relative to foreign currencies is at an interesting juncture as the chart below shows. Over the past month it has been battling with a confluence of resistance right at its 200 and 400 day moving averages.

Gold vs. Foreign Currencies

From a market standpoint, the stock market is key as it will front-run Fed policy. It’s a reflection of the economy and health of corporations. A stronger stock market means tighter Fed policy.

That could go out the window if and when the S&P 500 loses its recent lows at the 400-day moving average. But these lows could hold for several months.

S&P 500 & Yield Curve

The yield curve continues to flatten, which is not bullish for Gold. Steepening is.

Although the Fed said something about rate hikes coming to an end and the market now expects only two more hikes, the conditions are not there for Gold.

On the fundamental side, history argues that conditions turn most bullish after the last hike and when the market begins to discount a new rate cutting cycle. It appears we are still months away from the last hike.

On the technical side, there is improvement in the leading indicators but nothing definite yet.

Gold has not broken out of its downtrend relative to US stocks nor has it broken out against foreign currencies. These things should happen before a bull market begins.

In the meantime, don’t try to catch falling knives or chase weakness as there will be plenty of time to get into cheap juniors that can triple and quadruple once things really get going. Moreover, the start of the next bull looks to be more than a few months away.

Consider our premium service which can help you ride out the remaining downside and profit ahead of a major bottom in the sector. To prepare yourself for an epic buying opportunity in junior gold and silver stocks in 2019, consider learning more about our premium service.  

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Interview: Balance Between Buying Weakness vs. Holding Cash

Jordan Roy-Byrne, Founder of The Daily Gold joins me today to share his thoughts on the strategy of holding cash and deciding when to start buying. During tax loss selling there are a number of people who say it is a great time to start buying. However there are many factors to consider and right now holding cash is a preferable position to be in. We also dive into the silver chart.

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Interview: GDX vs. GDXJ & Rebound Status

Jordan Roy-Byrne joins me today for a quick update on the metals sector. We look at the discrepancies between the GDX and GDXJ charts. We also consider the impact of the upcoming Fed meeting in December and the possibility of a relief rally in the US markets. This bounce in GDX has already gone on a longer than we thought but there is some serious resistance ahead.

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How to Catch Bottoms in Gold Stocks

It is very difficult to pick exact bottoms but there are many tools we can use to help us pinpoint potential bottoms.

You don’t hear technical analysts talk about fundamentals but we do for a reason. Major shifts in the primary trend are supported by fundamental shifts, though they can be very hard to spot until after the fact.

Because of our extensive study of history, we are convinced that precious metals will not begin a real bull market until the Fed stops hiking rates. The data shows that many times (though not every time) the gold stocks bottomed soon after the Fed’s final rate hike.

Yes, we’ve beaten this to death but the point is fundamentals matter.

Moving on, we are going to introduce you to a number of tools and indicators which you can use to spot potential bottoms and turning points on a shorter term basis.

The first and foremost focus should be the price action and the various support and resistance lines that are nearby.

In the chart below, we highlight the support and resistance areas.

For example, GDX last week bounced from support at $18. It faces strong resistance above $20. A loss of $18 would likely lead to a test of support in the $16s. GDXJ meanwhile, bounced from its September low at $26. It faces strong resistance near $30 and if it loses the recent low could test support in the $22-$24 range.

GDX & GDXJ Bar Charts

After considering the price action and important support and resistance levels, we turn to the breadth indicators which provide us information in regards to sector participation and divergences.

We plot GDX below along with its advance decline (A/D) line, the bullish percentage index (BPI) and new highs minus new lows.

GDX & Breadth Indicators

The A/D line, which is one of the most trusted leading indicators is flashing a negative divergence. It looks similar to the one in early 2015. Note that it flashed a major positive divergence in early 2016. Smaller positive divergences were seen in March 2018 and September 2018.

The BPI currently is not telling us much. It needs to fall to 10% for the sector to be considered very oversold.

Days ago the new highs minus new lows indicator hit nearly -40%, which is fairly oversold. In my opinion over -50% or even -70% tends to signal a sustained low as it did in late 2014, summer 2015 and late summer 2018.

Another breadth indicator (and one we custom made for GDXJ) is the percentage of stocks that closed above various moving averages. Below we plot GDXJ along with the percentage of a basket of 55 junior stocks (mostly in GDXJ) that closed above the 20-day moving average, 50-day moving average and 200-day moving average.

GDXJ & Breadth Indicators

This data showed a strong positive divergence in early 2016 as well in late 2017 and to a lesser degree in late 2016. Last week it showed …read more