I think we’ve seen this movie. Gold is in a larger downtrend and correction but rebounds after a Fed meeting, leading many to hope Gold struck an important bottom.
You can probably guess what I’m thinking. The weekly chart below shows that Gold bounced from $1750 again.
It also shows that real yields are threatening a breakout (blue arrow) while Gold against the stock market hasn’t had any meaningful rally in over 18 months!
Gold is showing strength against foreign currencies, but it must outperform the stock market if it will sustain any strength.
The miners already rallied quite a bit on Gold’s reversal. From before the Fed decision on Wednesday to the highs on Friday, VanEck Gold Miners ETF (NYSE:GDX) and VanEck Junior Gold Miners ETF (NYSE:GDXJ) rebounded 10%.
We plot GDXJ below, along with our custom breadth indicators.
GDXJ was very oversold as the percentage of GDXJ stocks trading above the 20-day, and 50-day moving averages was near 0% after Tuesday. In addition, 33% of GDXJ stocks had hit a new 52-week low.
GDXJ could find initial resistance around the 50-day moving average, which is another 7% upside.
Fed tapering is starting, which is a catalyst for a rebound in real yields. That is bearish for Gold.
The chart below plots the real 10-year yield and highlights periods of Fed tapering. Those periods usually entail a rise in real yields.
Although precious metals (specifically the miners and Silver) are oversold, there are too many reasons to be skeptical of this rally.
Real yields are likely to rise, which will keep a lid on any rally. In addition, unless the stock market corrects dramatically, there will not be a shift in capital into precious metals.
On Friday, Bloomberg showed a 49% chance of a rate hike in March 2022. That is only three months away. There was a 65% chance of a rate hike in May 2022, and that meeting is less than five months away.
History shows that precious metals typically decline in the months leading up to the first rate hike (of a new cycle). The good news is that after the start of the last four rate hike cycles, Gold has rebounded an average of 28% and Silver an average of 42%.
Weakness before the first rate hike should allow you to buy some incredible bargains over the coming months. The tide for Gold will turn after the Fed hikes interest rates.