Gold continues marching higher, which is leading to bigger gains in gold miners. Meanwhile, one of Eric Fry’s gold miners hits a new 52-week high
We got the gold breakout we wanted. In our June 12th Digest, we highlighted recent bullish action in gold, suggesting the precious metal was likely in for more gains.
As part of the thinking in that issue, we pointed toward gold’s tighter trading pattern, evidenced by its narrowing trend lines. That, combined with low volatility, suggested a big move to the upside could be coming.
Here’s the chart from that Digest showing the trend line wedge-pattern and volatility compression.
Below is the takeaway from that Digest:
A study of market history shows that assets often make strong moves after going through periods of compressed price action and compressed volatility. Since the long-term trend of gold is up, the odds favor a breakout to the upside.
That’s exactly what’s happened over the past two weeks.
***Gold has now popped to a 6-year high
Since our Digest earlier this month, gold has climbed 6%. That’s a big move for the precious metal.
As you can see below, over the past two weeks, gold has broken out of its wedge trading pattern. Notice its price piercing the top, long-term trend line, as circled in green.
As I write Tuesday morning, gold is up nearly another 0.5%, trading just over $1,430.
This puts gold at its highest level in nearly six years. And it’s now up roughly 10% on the year, and is on track to record its best monthly performance since February 2016.
***Behind these gains are geopolitical tensions, a weakening Dollar, and a dovish Fed
There are several tailwinds pushing gold higher.
We have the ongoing trade war with China, which doesn’t appear to be reaching a meaningful conclusion anytime soon. There have also been the recent tariff spats with Mexico and India.
Most recently, gold has benefited from tension in the Gulf. Yesterday, Trump signed an executive order imposing “hard-hitting” sanctions on Iran in retaliation for the downing of a U.S. drone last week.
Given gold’s historical role of being a wealth safeguard, it’s an obvious beneficiary of these geopolitical worries.
Meanwhile, the U.S. Dollar has been weakening, with the Intercontinental Exchange Dollar Index now dropping below its 200-day moving average.
When the U.S. Dollar is weaker, it means investors have to spend more Dollars to purchase the same international goods that required fewer Dollars just weeks or months before when the Dollar was stronger.
Given this, as the Dollar weakens, that means more Dollars are required to purchase the same amount of gold (all else equal). This puts upward pressure on gold’s market price.
Finally, last week, the Fed all-but guaranteed there will be a rate cut (or two) coming this year. As interest rates fall, interest-paying investments lose some of their attractiveness relative to gold. This serves as yet another tailwind for the metal.
In short, though we wouldn’t be surprised to see gold take a breather at some point after its recent meteoric climb, the long-term case for more gains is compelling.
***While these tailwinds points toward higher gold prices, the gains could be even bigger for gold mining stocks
Investing in gold mining stocks is like investing in gold … on steroids. In this case, the steroids are “leverage.” Because many gold mining companies operate with significant debt, they tend to rise much faster than gold during bull markets … and fall much faster during bear markets.
For example, the chart below compares the price of gold with “GDX,” the VanEck Vectors Gold Miners ETF over the past five years. GDX is one of the largest gold mining ETFs in the world. Notice how GDX (the black line) tends to swing with much greater volatility than gold (the navy blue line).
But now, let’s zoom in. While gold is now up roughly 10% in 2019, GDX has nearly doubled that return …
***Given this, it comes as little surprise that one of Eric Fry’s gold mining recommendations just hit a new 52-week high
Eric Fry, editor of The Speculator, is our resident global macro investor. As a macro investor, Eric scours the global markets, looking for the best opportunities regardless of what they are, or how they present themselves — as we like to say, Eric finds profits “in any asset, in any place, at any time.”
It was last fall that Eric tipped off subscribers on the opportunity in gold mining stocks. One in particular had his attention — Detour Gold out of Canada.
From Eric’s October issue:
Detour is in the early stages of reaping the cash flow from prior investments. During the last five years, the company mined a total of 2.6 million ounces of gold and produced about CA$165 million of free cash flow.
The next five years promise even greater prosperity. Management expects to produce about three million ounces of gold over that timeframe and to generate total free cash flow of CA$1.1 billion.
That’s the good news.
The other news is that the company’s share price is quite depressed. It has slumped about 70% from the high it hit in early 2016, which is about double the decline that the VanEck Vectors Gold Miners Index suffered over the same timeframe …
Based on consensus estimates, Detour is on track to triple per-share earnings by 2021, even with almost no increase in the gold price between now and then. Obviously, therefore, a sharply rising gold price should produce a sharply higher result.
So, how did this play out?
Well, since we’ve been highlighting the relationship between gold prices and the market prices of specific miners, let’s look at Detour relative to gold since the day of Eric’s recommendation back in October.
As you can see below, while gold has enjoyed solid gains since the fall, Detour has posted nearly 3x the return.
As mentioned above, Detour just hit a new 52-week high. At the time of this writing, Eric’s subscribers are sitting on gains of more than 40% from the official entry price.
***One more reason why gold miners could push higher
One indicator we can look toward to give us an idea as to where gold miners might go from here is the “BPI” or gold miners bullish percentage index.
The BPI is one way to look at something we call “market breadth.” Breadth is a way of determining the extent to which the majority of investments in a particular market are rising (or falling). Positive breadth means more investments are advancing then declining — this suggests the bulls are in control of the market. The converse is true as well.
Historically, BPI percentage readings above the 70% level would be considered “overbought”, and would suggest a bearish trade might be considered. On the other hand, readings below the 30% level would be considered “oversold”, which means a bullish trade could be setting up.
Where are we now?
The chart below was last updated on 6/14, so it doesn’t reflect the most recent moves in gold and miners. That said, note how low the BPI reading is — and remember, this data does reflect the big jump in gold and miners that began in late May and continued through the first two weeks of June.
You’ll see this data on the bottom of the chart (below the red line). The top part shows the price of gold, which we’ve already discussed, so you can ignore that.
Though we’d expect the BPI to rise at the next update, the distance before hitting “overbought BPI levels” suggests that miners still have room to run.
We’ll continue to keep you up to speed as to what’s happening with gold and gold miners over the coming weeks.
Have a good evening,