The current economic climate is ideal for a major move in gold and gold mining stocks, writes Landon Whaley.
We initiated the Goldfinger macro theme on Jan. 7, 2019, because we saw the same economic data and central bank policy mix as back in January 2016, just before gold ripped +22.9% and gold miners shot to the moon, gaining 96.7% in the first six months of the year. And while we warned in that initial report that gold and gold mining stocks will probably not duplicate the 2016 performance in the first six months of 2019, the performance of gold and gold miners through the first five months of this year left a lot to be desired. In fact, we benched this macro theme during May and June, because in our view the theme had turned up. At the time of the benching, we said, “Gold and gold miners will come back to life soon enough; all we need is a little patience.” Our patience has paid off because these markets are fully awake and ready to party.
The Catalysts
This macro theme is driven by two primary catalysts: slowing U.S. growth and declining U.S. yields.
Simply put, there is no better environment for gold than when the U.S. is in a Fall or Winter Fundamental Gravity, both of which are characterized by growth slowing. In these growth-slowing regimes, gold averages a quarterly gain of 3.5% and has positive returns 72% of the time, which can be accessed through gold futures or the SPDR Gold Shares (GLD). And the VanEck Vectors Gold Miners ETF (GDX), which is just a leveraged play on gold, gained an average of 4.6% and is positive in 76% of all growth-slowing quarters. That said, Winter can be a tricky season to trade gold miners, so we’ll manage that exposure accordingly (while gold related stocks tend to perform well along with gold, if your underlying thesis is gold is going higher than it is best to invest in gold not a stock).
Economic data for the last nine months has confirmed this growth-slowing reality, and the recent financial market price action is confirming it too. If the economic data spew in the U.S. Shift Work macro theme update isn’t enough to convince you, remember that utilities and REITs just busted moves to brand new all-time highs, which 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. yields.
Thank you, Mr. Powell
This macro theme got a proverbial shot in the arm on June 19 when the Fed removed the “patient” terminology from its meeting minutes, and Powell’s comments all but ensured multiple rate cuts during 2019. The aftermath of the announcement included the absolute drubbing of 10-year yields, which fell seven basis points that day and closed at 2.023%, the lowest level since September 2017. More importantly, it confirmed a breach of a critical abyss line at 2.077%. This breach to the downside is a significant development because the next abyss line is down at 1.858%. That’s right folks, the next most likely stop for U.S. 10-year yields has a 1-handle. U.S. 10-year yields have been making a series of lower highs since peaking on Oct. 5, and 30-year yields have been in their own downtrend since peaking on Nov. 2. But the downside break of 2.077% on the 10-year and 2.548% on the 30-year added kerosene to our bullish fire in gold and gold-related equities.
The Bottom Line
Every aspect of the current Fundamental Gravity, from the data to Fed policy, is conducive to being long gold and gold-related assets. The economic data continues to deteriorate, the Fed is providing us with the second-best policy backdrop for a bull market in gold (outside of a rate cut), and yields are being punished. We continue to believe these markets will be among the best performers through the second half of the year. That said, don’t chase these markets higher if you don’t already have your foot in the door. There will be a buyable pullback in the coming weeks, and when that materializes, The Mongoose will give us the green light.
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