Hello, Reader.
According to the late, great investment sage, Sir John Templeton, “Bull markets are born on pessimism [and] grow on skepticism.”
If that statement is true, the new gold bull market has a lot more growing to do.
Even though the yellow metal’s price has soared 30% since last October – outperforming the S&P 500 by a large margin – skepticism abounds. Very few investors seem to care about the recent gold rally, even fewer seem to believe it will continue.
But the real question is… should you put your faith in gold stocks right now?
My answer is yes.
So, in today’s Smart Money, I’ll explain why. We’ll look at the recent action in the gold market… the factors that should support higher gold prices this year… and then I’ll share where you can find the best gold plays.
Skeptics Abound
The chart below tells the tale of gilded disbelief. It shows the gold price, alongside the rolling six-month investment flows into, or out of, the SPDR Gold Shares ETF (GLD) and the VanEck Gold Miners ETF (GDX).
Near the middle of the chart – from 2018 to 2020 – the gold price was moving sharply higher. Money flows did the exact same thing; they moved sharply higher into the two gold funds.
But look at the right side of the chart. Once again, the gold price is moving higher. But this time, money flows are declining. Capital is flowing outof these two gold funds on a net basis.
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…
In the January issue of Fry’s Investment Report, I predicted, “The precious metals markets, as represented by the Sprott Physical Gold and Silver Trust (CEF) will outperform the S&P 500 Index this year.”
In Fry’s Investment Report, I’ve recommended certain stocks to capitalize on that possibility. Also, in my trading service The Speculator, I recommended two gold plays in March that are delivering market-beating results already. One of the trades is up about 45%, while the other has doubled.
Nearly nine months remain before the curtain falls on 2024, but gold is certainly off to a good start. CEF is up 16%, compared to a gain of 7.7% for the S&P 500.
A Worthy Portfolio Hedge?
I continue to like the yellow metal’s prospects for 2024, at least as a worthy portfolio hedge.
For starters, 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.
Perhaps that’s why the yellow metal has hit a series of record highs during the last few weeks. The simmering hostilities in the Middle East are also contributing to the gold-buying impulse.
As I remarked in the January “Forecast Issue” of Fry’s Investment Report…
Almost nothing benefits from geopolitical tension or wars, other than weapons manufacturers… and gold. Hopefully, the current tensions around the world moderate throughout the year. But the mere possibility of growing instability could support a strong gold price.
Gold stocks are trending higher as well, but they remain well below record levels. The XAU Gold and Silver Stock Index is still 29% below the all-time high it hit 13 years ago. Thanks to this relatively lackluster price action, 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!
By the way, the second half of Templeton’s famous saying about bull markets asserts that they “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.
(Already a Fry’s Investment Report subscriber? Click here to log in to the members-only website now.)
Regards,
Eric Fry
P.S. There’s a new wealth “mecca” here in America… far from either coast.
And everyone, including one-percenters, is rushing to be a part of it.
I’m calling it the Rebirth of America.
Time is of the essence… and you should claim your stake while you can.
