Eric Fry’s gold prediction is playing out… investors hate gold’s bull run… who is buying gold?… the case for more gains to come… how to play it
In January, our macro expert Eric Fry made a prediction:
The precious metals markets, as represented by the Sprott Physical Gold and Silver Trust (CEF) will outperform the S&P 500 index this year.
We’re a long way from 2024 being in the history books, but that prediction is spot on so far.
As you can see below, CEF is up 17% on the year, which is not only beating the S&P’s return but also nearly 3Xing it.
But the real question is… should you put your faith in gold stocks right now?
My answer is yes.
Let’s find out why.
An unloved bull run
There’s something odd happening in the gold market…
At the same time that we’re seeing a succession of new all-time highs, retail investor interest is falling.
Eric provided the following chart to his readers to illustrate. There are three things to notice.
First, the green line. This is the price of gold hitting new all-time highs.
Second, the blue line. This is the rolling six-month investment flows into, or out of, the SPDR Gold Shares ETF (GLD) and the VanEck Gold Miners ETF (GDX). This is a proxy for retail investor interest in gold.
Third, we have the section of red. This shows us when flows into GLD and GDX are negative.
This chart covers 2014 through today. I’ve circled in blue what’s happened since 2023 so you can see it better. In short, retail investors are dumping gold even as it hits new all-time highs.
Here’s Eric’s quick takeaway with what this means for the life of this bull run:
This skepticism suggests the gold rally is still in its early stages, which would be good news for the forecast I made three months ago.
So, who is buying gold then?
While Eric’s analysis segues into why gold is likely to continue outperforming (which we’ll cover momentarily), let’s briefly digress.
If retail investors aren’t buying gold, then who is? After all, someone must be pushing it to these new highs.
The answer is rather telling, and yet another reason that’s supportive of owning gold today…
Global central banks.
From the Financial Post:
[Gold] bullion is popping to all-time highs again, but this time investors are fleeing gold miners’ stocks in droves.
Even gold exchange-traded funds, which use investors’ money to acquire physical stockpiles of bullion, are contracting as gold prices rise, which is precisely the opposite of what many analysts expected.
The disconnect ties into a broader trend in which the profile of the largest buyer of gold has shifted: investors are fleeing the gold industry, dumping gold mining stocks and redeeming gold ETFs, while central banks around the world, particularly in China, have dramatically increased annual bullion purchases during the past two years.
The chart below illustrates this ramped-up buying from global central banks.
We’re looking at purchases dating back to 2010. Notice how the volume of gold bought in 2022 and 2023 towers above all other years.
I’ll add that last year, China reported a net increase of 225-tonnes in its gold reserves. That was its largest increase since 1977.
Though we’ll dive into this topic in a different Digest, I’ll quickly note how part of this is China’s effort to escape dollar hegemony. At the same time that Beijing buys more gold, it has been cutting its holdings of U.S. Treasurys.
As of last November, China’s stockpile of U.S. government debt hit its lowest level in 14 years.
Here’s a cartoon from Wall Street Silver illustrating this “currency war”…
Source: @WallStreetSilv / @Merk Investments
For our purposes, it’s enough to know that China is a massive buyer of gold, and that’s unlikely to change anytime soon.
Circling back to Eric, why does he remain bullish on gold today, even as it hits new all-time highs?
For one, it’s a hedge against a potential resurgence in inflation.
Back to Eric:
Inflation might not be fading as quickly as hoped. The March Consumer Price Index (CPI) jumped 3.5% year-over-year, which was an unwelcome increase from the prior month’s 3.2% reading.
Stocks tanked on the news, as investors collectively fretted that the Federal Reserve might not cut interest rates as rapidly as previously expected.
Stocks, like almost every other financial asset, abhor inflation. But gold doesn’t mind it so much.
In fact, historically, precious metals tend to perform well during periods of stubbornly high inflation readings.
On this note, yesterday, Federal Reserve Chair Jerome Powell spoke to the recent uptick in inflation saying:
The recent data have clearly not given us greater confidence [that inflation is progressing toward the Fed’s goal as desired] and instead indicate that it is likely to take longer than expected to achieve that confidence.
Translation: Stop expecting loads of rate cuts in 2024.
And if you’re clinging to the belief that inflation will magically fall to 2% as the Fed wants, here’s some added perspective from the research shop Bespoke.
For context, here are the month-to-month CPI readings for the last six months:
- 0.1% Oct 2023
- 0.2% Nov 2023
- 0.2% Dec 2023
- 0.3% Jan 2024
- 0.4% Feb 2024
- 0.4% Mar 2024
That’s an average of 0.2667%… and rising.
Meanwhile, for another reason to own gold today, we can point toward its valuation tailwind
Despite gold’s run, Eric notes that gold stocks remain well below record levels. The PHLX Gold/Silver Sector Index (XAU) is still 29% below the all-time high from 13 years ago.
And when we factor in gold’s valuation relative to the S&P, the opportunity becomes even more attractive.
Here’s Eric explaining:
Thanks to [gold’s] relatively lackluster price action [over the last 30 years], gold-stock valuations, relative to the S&P 500 valuations, are close to all-time lows.
Obviously, these extreme pricing and valuation disparities do not guarantee that gold stocks will continue closing the gap between themselves and the S&P 500. But they do suggest that the gold market is offering an attractive entry point, at least for a trade.
For example, if the XAU Index merely traded up to its average valuation, relative to the S&P 500, it would triple!
So, how do you play this gold bull?
Eric referenced two ways earlier in this Digest: the SPDR Gold Shares Fund (GLD), and the VanEck Gold Miners ETF (GDX).
For a third, physical option, I’d point you toward an unexpected source…
Costco.
Though many investors are shying away from gold, the retail giant has been selling gold bars, and customers can’t get enough.
From Forbes:
Coinciding with the surge in gold prices is a viral moment for Costco’s online sales of physical gold bars—you can add to [e-commerce] cart a roughly $2,000 bar of gold next to your toilet paper, but you have to go in person for a rotisserie chicken.
The warehouse’s gold bars typically sell out within hours as the Costco bars pose a surprisingly good vehicle for investing in gold, considering buyers can get cash back via their Costco memberships and credit cards.
Apparently, Costco is now selling more than $200 million worth of gold bars each month. If you have a safe place to store it, this is a great option.
As for Eric, he has exposure to gold through a few different plays in his Investment Report portfolio. He’s also juicing his gold returns through call options in his trading service, The Speculator.
As I write Wednesday morning, his latest two gold recommendations in The Speculator, made on March 21, are already up, respectively, 32% and 133%. Congrats to all Speculator subscribers on what’s shaping up to be a fantastic trade.
Best of all, based on how uninterested investors appear to be in gold, we might still be very early in this bull run. Here’s Eric on this note to take us out today:
According to the late, great investment sage Sir John Templeton, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”
Clearly, no sign of either optimism or euphoria about the gold price has entered the collective investor psyche. Maybe that day will arrive if gold clears $4,000 an ounce.
Given the bullish factors that are aligning behind the gold price, the yellow metal seems likely to deliver some upside surprises over the coming months.
Have a good evening,
Jeff Remsburg
