We continue to believe that precious metals remain in a primary bull market. But after becoming significantly overbought, price corrections have been substantial.
Gold has taken its second worst drop since 2016, the date we would assign to the beginning of its new bull phase. It has come down to the 50% retracement level as measured from the spring Lockdown bottom, to the recent peak. In addition, gold has descended to one of the more important long-term moving averages, the 200-day moving average.
Since then gold has bounced, but as of this writing, we can’t know if this is just a temporary phenomenon or whether gold has just put in a major bottom. It will take a bit more time, but for those that believe the bull market will continue, this is an excellent “buy the dip” opportunity.
Conditions certainly are ripe for a bottom. Both momentum indicators on gold and sentiment indicators are in very oversold territory. And, it is fairly common during a bull phase to bounce off the 200-day moving average.
On the other side of things, the stock market is putting off significant signals of being extremely overbought.
In addition, the dollar is looking weak.
While it has been a raucous year for the metals, just about everything in the metals complex shows good gains for the year.
The chart below compares the price action, year to date, of gold bullion, silver bullion, platinum, the US dollar index, the stock market and gold mining shares. Gold is up 20.16 % year to date, silver up 34.37%, palladium up 26%, mining shares up 22.85%, the S&P is up 13.56%, and the US dollar index is down 5.15%.
As you read or hear the financial press, it would not be very obvious that gold and silver have substantially outperformed the stock market and the dollar, would it?
Frankly, that ignorance suits us just fine. Let the ink be spilled about the stock market while less attention is given to the performance of the metals.
The best performing metal year to date, is silver. It has beaten gold and even gold mining shares (which are supposed to be leveraged to the gold price) by a whopping 50%. It has beaten as well, most of the broad stock averages, with the exception of the tech laden QQQ, or the 100 largest companies in the NASDAQ.
Finally, there are also conditions of seasonality to be considered when considering this recent test of lows in the metals. This study is for the past five years, and it indicates that the highest probability for advance in the metals is during the next two months. In December, the price ends the months higher 80% of the time, and in January it is 100% of the time.
Once again, technical studies cannot guaranty a favorable outcome. There are no such guarantees in markets. However, they certainly suggest the odds are favorable.
Charts courtesy of stockcharts.com. Information derived from sources believed reliable but cannot be guaranteed.
Neland D. Nobel, is a retired portfolio manager and Certified Financial Planner with 45 years of market experience in the securities and gold industry.