The fundamental driver for Gold is declining real interest rates or expectations of a decline in real interest rates. Fed rate cuts or accelerating inflation and rising inflation expectations lead to declining real interest rates.
In the current macro-market context, the most important indicator is something different.
Recently, we wrote why the real bull market has barely started.
A huge bull market in Gold precludes the stock market from performing well.
Sure, there can be some periods when both perform well together. These include the early to mid-1960s, 2003 to 2007, 2009-2010, and 2020.
However, given the structure of the Gold market, the next leg higher will include dramatic outperformance against the stock market.
The Gold to S&P 500 ratio (bottom right) needs to break past a 7-year range (resistance at 0.70). That break is likely to coincide with Gold exploding out of its cup and handle pattern and past $2,100/oz.
The cup and handle pattern is super bullish and there’s little chance Gold is going to bust out of it while capital favors US equities.
Hence, the Gold to S&P 500 ratio is the most important indicator, at present, for Gold and the Gold market.
Capital has moved out of bonds and into stocks and commodities.
Worries over accelerating inflation, stagflation, and the like will trigger capital rotating primarily into Gold and Silver instead of stocks.
In the meantime, the US dollar has put in a bottom and could trend higher or remain stable well into the third quarter of the year. That could keep a lid on inflation expectations.
Some leading indicators that could indicate Gold is closer to a renewed uptrend (and not just an oversold rebound) include Gold’s performance against the S&P 500 as well as foreign currencies.
As an investor, I’m positioning myself in the highest quality companies with the most upside potential. I’m looking for and investing in companies that have a defined value, fundamental quality, and have the potential to be 5, 7, and 10 baggers when the real bull market begins.