Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Gold Prepares To Rally

By Peter KrauthCommoditiesAug 04, 2021 09:00AM ET
Gold Prepares To Rally
By Peter Krauth   |  Aug 04, 2021 09:00AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

It’s been a whole year since gold hit its all-time high near $2,060. Since then, the precious metal has been in a correction phase that has seen it, along with gold miners, remain range-bound.

But that may be about to end.

All the fundamentals that pushed gold above the $2,000 mark are not only present, they’re more entrenched. Inflation, ultra-low interest rates, government stimulus spending and, of course, the COVID-19 pandemic.

Now, we also have the unresolved debt ceiling debate, along with a likely fourth pandemic wave, which should help put an even more solid floor underneath the gold price. On top of all this, we have other indicators suggesting that gold and gold stocks, in the near term, could be set to run.

That makes now an opportune time to allocate to the gold mining sector in advance of broader recognition by the market.

Falling Real Yields Point To Higher Gold

If there is one chart that captures why the setup for gold is so bullish right now, then this would be it.

Spot Gold Vs Real Yields
Spot Gold Vs Real Yields

The single best predictor of gold price direction is real interest rates.

The 10-year inflation adjusted yield is the most widely used indicator for real interest rates which, essentially is 10-year rates minus inflation. That’s the real return on an investment in a 10-year U.S. Treasury.

And right now, that real yield is pathetic. Not only is it pathetic, at -1.11%, it’s the lowest it’s been…ever.

10-year Treasury
10-year Treasury

In fact, it’s also below what it was 12 months ago, back when gold reached an all-time nominal high at $2,060. Which suggests gold should be even higher right now.

And what’s happened since then?

The US dollar index may have peaked at 93 after rallying on the back of the Fed’s slightly hawkish taper talk. But Fed Chair Jerome Powell just recently said the US had not reached “substantial further progress” in order to start curbing the Fed’s $120 billion monthly bond purchases.

Powell also repeated that raising interest rates was not even being considered yet. The likeliness rates will only rise more than two years from now, combined with persistent inflation, explains why real interest rates have continued falling.

Although a lot of the inflation talk was about how much lumber prices had soared, and recently dropped, the rest of the commodity complex has actually held very steady, with some components rising further. The expanding money supply and fiscal easing to support an economic recovery are deep-rooted. So I expect inflation, weakening currencies, and investors to shift towards assets that will offer protection in this kind of environment.

Remember, the Fed continues to say that recent high inflation is transitory, and they’ve been saying that they are willing to let inflation overshoot 2% for some time to average out to 2% over the longer term. They call this “symmetric” inflation targeting. And the European Central Bank has just announced it will drop its just-under 2% inflation target, and instead aim for “symmetric” inflation targeting as well. These are two major central banks saying they’re happy to let inflation run hot for some time.

Perhaps they’re considering that the U.S. Economy may not be as healthy as it appears. It expanded at a 6.5% annualized rate in Q2, but actually missed consensus forecasts of 8.4%, which is likely what caused the Fed to back off on the tapering talk. What’s more, consumer price inflation (CPI) forecasts have crept higher, with US levels expected to rise to 2.5% for 2022.

Sophisticated Investors Buying Gold

While many central planners continue to disparage gold, what they’re doing with their money is quite the opposite.

In May alone, Thailand bought 46.7 tonnes, Turkey added 8.6 tonnes, and Brazil bought 11.9 tonnes making for its first purchase since 2012. Kazakhstan bought 5.4 tonnes, Poland 1.9 tonnes, and India 0.9 tonnes.

Serbia’s National bank said, "Long term, gold is the most significant guardian and guarantor of protection against inflationary and other forms of financial risks.” President Aleksandar Vucic recently indicated the National Bank of Serbia was looking to up its holdings from 36.3 to 50 tonnes of gold.

Commenting on central bank buying, James Steel, chief precious metals analyst at HSBC said, "If a central bank is looking at diversifying, gold is a marvelous way of moving out of the dollar without selecting another currency".

Recent buying has likely been bolstered by economic recovery and higher oilprices, encouraging emerging market nations to boost their gold holdings. The latest estimates show a trend in gold buying from central banks as they increasingly look to diversify their reserves.

Akash Doshi, along with other Citigroup analysts, wrote in a report that if the economy continues to gain steam, central bank buying might reach as high as 1,000 tonnes. That would be very impactful, and would represent over 20% of the annual 4,500 tonne gold supply.

Central Bank Demand
Central Bank Demand

This mindset is even permeating through to actual government-level treasury management. The state of Idaho recently passed House Bill 7, the Idaho Sound Money Reserves Bill, with overwhelming support. The Bill, to be heard in the Senate, would permit—but not require—the State Treasurer to hold some portion of state funds in physical gold and silver to help secure state assets against the risks of inflation and financial turmoil and/or to achieve capital gains as measured in Federal Reserve Notes.

Time For Gold Stocks

And yet gold is down about 10% after a 12-month long correction. Naturally, since they leverage gold prices, gold equities have gotten proportionally cheaper.

Looking back over the past two decades, gold and silver miners have never had such a favorable profitability profile.

Gold and Silver Miners
Gold and Silver Miners

In fact, they recently completed their largest debt repayment ever and have never enjoyed such high levels of free cash flow.

Still, gold miners remain invisible to most investors. However, some of the most astute market participants are noticing just how irresistible this sector is right now.

The following chart plots the VanEck Vectors Gold Miners ETF (NYSE:GDX) against the gold price. When gold stocks start outperforming gold, it suggests a new rally phase has begun.

GDX vs Gold
GDX vs Gold

I believe that’s what we have right now. Over the last three weeks, GDX has been gaining on gold, even as its price has been rising. At the same time, both the RSI and MACD momentum indicators are confirming this move, and have plenty of room to run higher before becoming overbought.

What could go wrong? The biggest risk is that the U.S. dollar could regain some strength. Technically, there is a reasonable argument for this, as the 50-day moving average has just crossed above the 200-day moving average forming a bullish “golden cross.”

Still, momentum indicators point to further downside. Fundamentally, with Treasury yields so low and falling, the dollar would have to decouple from these to head higher. I think the odds are relatively low. And still, gold can rally even with a strengthening dollar.

One great way to play this current setup is to own the GDX itself. It’s an ideal one-click way to buy a basket of some of the world’s largest public gold miners and gold royalty companies. You get instant diversification for a 0.51% expense ratio, with immediate exposure to the gold mining sector. It’s got $14.6 billion under management and great liquidity with an average 20 million shares traded daily.

I’d be hard-pressed to think of a more promising setup. While most other asset classes and sectors are well overbought, gold and gold stocks are bargains by several measures. This is the place to be as gold prepares to rally.

Gold Prepares To Rally

Related Articles

Satendra Singh
Natural Gas: Anxiety At High Pitch By Satendra Singh - Sep 27, 2021 7

Natural gas prices surged in response to increasing signs of a global energy shortage at the start of the northern hemisphere winter heating season. Futures started this week with...

Gold Prepares To Rally

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
warrior black
warrior black Aug 05, 2021 2:27AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
excellent analysis about gold prediction with different angles of the market. i get the same feeling that gold will fly high.
michael engel
michael engel Aug 04, 2021 5:16PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Draw : June 2019 low to Mar 1 2021 close. ZG might hug this line for few more weeks, before closing the gaps below.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email