While attention has rightly focused on technology stocks and cryptocurrencies,
gold has quietly surpassed a crucial price level that could trigger a
multi-month uptrend in the precious metal's value, potentially initiating
significant implications in the longer term.
Market participants often perceive such moments as the beginning of bear
markets in stocks. While there is some truth to this notion, it's crucial to
avoid thinking in black and white terms. On a larger time basis, this may hold
true. However, from a more realistic standpoint, both gold and equities can
move in the same direction.
The real 'issue' arises when gold performs well, and stocks begin to lag. This
is when one can start contemplating secular bear markets. It doesn't
necessarily mean stocks will crash, although that's a part of it. Generally,
one can expect a stock market that is relatively subdued compared to the
robust performances we have witnessed in recent years. Take a look at the
chart below, depicting the S&P500 vs. Gold ratio. We've discussed this ratio
for a while, and not much has changed. A yearly overview suffices, but for
now, it provides a clear idea of the dynamic between stocks and gold. In the
long term, when gold performs well, stocks seem to enter secular bear markets.
Now, examine the Gold chart below. We experienced a break above the upper
boundary back in December, which proved to be a somewhat false start upon
closer inspection of bar data. Currently, gold is attempting to break the
upper boundary for the second time.
We're witnessing gold trying to break the upper boundary once again. Similar
situations in the past have resulted in upward resolutions, kickstarting
multi-year uptrends in gold prices in 2003, 2009, and 2019.
This uptrend trigger could coincide with possible FED rate cuts. Typically, we
observe an inverse relationship between gold and US interest rates. This was
evident in 2000, 2007, and 2019 when the FED initiated rate cuts. Obviously,
the FED cuts rates when the economy appears shaky, so it's apparent that gold
moves higher when market participants perceive the economy and stock market
negatively. Note that this relationship is truly inverse only in the initial
stages of FED rate cuts, as seen in the chart below.
Finally, we can observe significant inflows into gold miners and junior gold
miners ETFs. In the graph below, you can see the aggregate flows into GDX and
GDXJ. This isn't always a perfect indicator, but a sudden high influx of
positive inflows typically coincides with upward-trending periods in gold.
Is this the beginning of an uptrend in gold? Based on current evidence, it
appears likely. How do you perceive the current price of gold? Let us know!