The trend towards slowing economic growth and declining Treasury yields is bullish for gold, says Landon Whaley.
This macro outlook on gold is driven by two primary catalysts: slowing U.S. growth and declining U.S. Treasury yields.
Simply put, there is no better environment for gold than when the United States is in a Fundamental Gravity #3 or #4 environment, both of which are characterized by slowing growth. In these slowing growth environments, gold — which can be accessed easily through the SPDR Gold Shares ETF (GLD) — averages a quarterly gain of 3.5% and has positive returns 72% of the time. Gold miners, which can be accessed easily through the VanEck Vectors Gold Miners ETF (GDX), gain an average of 4.6% and are positive in 76% of all growth-slowing calendar quarters.
Economic data from the first three months of 2019 are confirming this slowing growth environment, and so is the financial market price action. If recent economic data does not convince you, remember that utilities and REITs busting a move to brand new all-time highs (as they are now) only occurs when the United States is in the midst of a growth-slowing regime.
The data is backing our play here and so is the current momentum in U.S. Treasury yields. Thank you, Mr. Powell.
This macro theme got a proverbial shot in the arm on March 20 when the Fed canceled all 2019 rate hikes, lowered its GDP growth forecast, and announced the gradual end to its balance sheet reduction, thus completing the quickest 180-degree policy pivot in central bank history. The aftermath of the announcement included the absolute drubbing of 10-year Treasury yields, which fell 7 basis points that day and closed at 2.535%, the lowest level since December 2017. More importantly, it confirmed a breach of a critical abyss line. In last month’s update, we said, “Once 10-year yields break below the abyss line at 2.626%, gold will really start to move.” U.S. 10-year yields have been making a series of lower highs since peaking on Nov. 8, and 30-year Treasury yields have been in their own downtrend since peaking on Nov. 2. But the downside break of 2.626% on the 10-year and 2.970% on the 30-year added kerosene to our bullish fire in gold and gold-related equities.
Bottom Line
We finished the March update by saying “The playbook for March remains the same: buy the damn dip in gold, gold miners and silver.”
If you bought the early March dip in gold and silver, you’re still up marginally even after the thumping last Thursday and Friday. The more volatile gold miners gave us two dip-buying opportunities (first week of March and the middle of March), and here again, you will be (or would be) sitting on gains of 4.7% and 2.7%, respectively.
The economic data continues to deteriorate, the Fed just provided us with the second-best policy backdrop for a bull market in gold (outside of a rate cut), and yields are being punished like Silas in the Da Vinci Code.
The environment has only become more bullish for gold, gold miners and silver since we last spoke, so why change the playbook now? The remains the same: buy the damn dip in gold and gold miners.
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