The setup in precious metals

Favorable Market Environment

What a year it’s been to be a market participant. In Q1, the S&P 500 (SPX) had a 34% peak-trough drawdown on a daily-close basis. Can you believe it’s finishing the year up 17%? And under the hood, there’s been a wide performance gap between sectors like technology and energy.

But I would argue this volatility really started picking up in early 2018 – right after we had the lowest annual volatility for stocks on record which ended with the crypto and weed mania. While SPX is up an amazing 46% since 2018, it’s had a couple sizable drawdowns in that period. And many global equity indices like the German DAX and Canadian TSX are essentially flat since 2018 with similar volatility.

Interestingly, Gold had a return of 42% since 2018 (similar to SPX), but with a lot less volatility. Gold can be characterized by an uptrend, making a series of higher highs and higher lows.

This behavior is similar to the 1970s and 2000s when stocks were in a choppy environment, while Gold steadily trended higher. And that makes a lot of sense: high starting equity valuations & sentiment → high stock market volatility → accommodative monetary & fiscal policies → bullish conditions for Gold.


Young Gold Bull Market

It can be argued the bull market in precious metals may just be getting started. First, Gold made a 6yr base breakout last year, before making ATHs this year. The recent correction over the past 4 months has allowed Gold to retest the former 2011 highs.

Silver made a 7-year base breakout this June.

And hot off the press, Platinum just made a 5-year base breakout last week! These are all signs of continuation, not the end, of the gold bull market.

Here’s the daily charts of two junior gold & silver mining ETFs. We see tight consolidations within strong uptrends. This is bullish.

From the Aug highs to Nov lows, Gold corrected 15% while senior gold miners (GDX) corrected 25%. The junior gold & silver ETFs above fell less. Again, this is bullish action.


Intermarket Confirmation

The precious metals & mining charts are clearly bullish, but do we have confirmation from other assets classes?

Gold has the strongest positive correlation by far with real bonds. The weekly chart of TIP made a breakout last week.

Gold also has some correlation with the Swiss Franc, which like Silver, made a 7-year base breakout in June:

And here’s a daily chart of the Swiss Franc showing a 4-month breakout last week.

The daily chart for the Euro looks similar to the one above.  It’s hard to be bearish when the weight of the evidence is so favorable for precious metals.

I also want to share a monthly chart of Freeport-McMoran, a copper mining stock. It made a breakout last month from a 5-year double bottom base. The Canadian dollar (historically tied to copper and oil) is also sporting a similar double bottom look. This could not only be the continuation of the gold bull run, but also the start of a bull market in broader commodities. 


Strong Relative Strength + Low Sentiment + Positive Seasonality

The red-hot technology sector (including biotech and cleantech) has been getting a lot of attention this year. One of the top performing ETF’s in this space has been ARKW. But take a look at how the copper and junior gold mining ETFs have done in comparison.

And commodity-heavy Australia & Canada have been outperforming tech-heavy US since the March lows.

This may surprise people as commodities aren’t getting much attention. In fact, there’s been record low sentiment towards Gold recently on several measures: DSI, NDR Composite, HGNSI, BofA Flows, and NDR Flows.

Another factor than can cause strength in Gold to resume is seasonality. Over the past 20 years, Gold’s strongest performance of the year has been between Dec-Feb.


Summary

There is a confluence of bullish factors lining up for precious metals:

  • Favorable environment

  • Firmly established bull market confirmed by other asset classes

  • Strong support

  • Strong relative strength

  • Low sentiment

  • Positive seasonality

What more can you ask for?

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Credit: The charts above were made using StockCharts.com