As we went to publish this edition of the Gold Tracker, it had been our observation that consensus on the gold price had become almost universally positive. We had also noted over the last few weeks that silver had finally begun to outperform gold – one of the last elements that had been missing from the bull market landscape and signalling to us the further maturation of positive gold market sentiment.
A few pink flags in a maturing gold bull market
However, a couple of cautionary elements had also begun to emerge. We saw stories in the paper of university students and rugby players recounting happy tales about the money they have been making in gold bullion and gold equities: Just close your eyes and buy – what could possibly go wrong? From a more technical point of view, some key gold equities had stopped outperforming the gold price. In the last few weeks (from 21 July), the A$ gold price rallied a further ~10% to the end of last week and set fresh all-time highs. Despite this exciting environment, the ASX Gold Index (XGD) was up only 3% and benchmark names struggled to maintain recent highs – several were actually down over that period. Whether this represented a bearish view on the gold price creeping into the market, or simply buying fatigue, it was a notable shift in sentiment.
We should not be surprised that some volatility is emerging. Our latest price charts show the gold and silver prices well extended above their moving averages and US 5yr TIPS oversold. Gold and silver had become overbought on standard RSI indicators. The mean reversion of the gold-silver ratio from multi-decade highs was spectacular. A correction of sorts was looking due and valuations close to all-time highs for bullion and equities presented a profit-taking opportunity for many.
Overall, still a supportive price environment: buy the dip
Still, while this price move is technically damaging and we’ll now be looking for some consolidation to provide support to the medium-term outlook, we see the gold price environment remaining favourable. Gold and silver prices in both US$ and A$ terms remain above key support levels, gold remains relatively cheap in relation to US Equities (as measured against the Dow Jones Industrial Average) on a 10 year average basis and, importantly, real interest rates remain at 7-year lows, deep in negative territory. The economic impact of COVID-19 restrictions and second and third wave infections remain a rolling and uncertain factor in the outlook. These are, in our view, likely to remain catalysts for Government stimulus packages and loose monetary policy settings across key global economies for the foreseeable future, keeping downward pressure on real interest rates. Finally, from a trading perspective, COMEX net long gold positioning remains elevated (at least until the day it doesn’t).
To put the current market in perspective we have taken a look at the top-20 weekly gold price gains since 2005. This encompasses arguably four previous bull markets in gold, prior to the current one. So far, the biggest weekly gains of this market make just three appearances in a list dominated by gold’s rally out of the GFC – possibly the nearest comparable to our current circumstances. So, while we can see this gold bull market maturing and that some consolidation to take the heat out of it is to be expected, we remain of the view the environment is supportive and this may be a ‘buy the dip’ opportunity.