by Dave Kranzler, Investment Research Dynamics:
The market sentiment toward the precious metals is quite negative. Additionally, gold and silver are fighting both the ongoing official price-management, which seems to have intensified over the last 12 months, and the rising dollar. The rise in the dollar is technical in nature – certainly it’s not based on U.S. systemic fundamentals. The current financial and economic environment, both here and globally, is very similar to the late 2007-mid-2008 environment. Remarkably, the financial roadside bombs planted and getting ready explode are more numerous and contain more powerful explosives than the ones that detonated in 2008.
Given the “headwind” variables (manipulation, dollar rise, sentiment) at work, gold has held up remarkably well, especially in the context of the price-drop experienced by gold between mid-March 2008 and late October 2008, when it was taken down from $1020 to $720 (October 27, 2008 London a.m. fix), or 29.5%. A drop like that now would put gold below $1000. Furthermore, in my opinion, the miners have been quite resilient to hard sell-offs, even on days when gold gets hit pretty hard.
This chart shows the degree to which the miners are undervalued vs. the SPX:
Going back to 2005, the miners have mostly outperformed the SPX. I’m guessing that might surprise a lot of subscribers. After an extended period of outperforming gold from late 2008 to late 2011, the miners have been underperforming the SPX by a substantial margin since early 2013 through today. Based on the laws of probability and mean-reversion, the likelihood of that period of time when the miners once again outperform the SPX grows closer by the day.
Gold is holding up well vs. the dollar. The dollar is at its highest since mid-November and the price of gold is trading 2% higher than it was at in November. Also, don’t overlook that the Fed began its snail-paced interest rate hike cycle at the end of 2015. Gold hit $1030 when the Fed began to tighten monetary policy. I thought gold was supposed to trade inversely with interest rates (note sarcasm). Gold is up nearly 30% since the Fed began nudging rates higher. The chart on the next page shows the ratio of the price of gold to the US Dollar index:
When that ratio rises, gold is outperforming the dollar. When the it falls, the dollar is appreciating vs. the price of gold. While the ratio has dropped since early April, you can see that it’s been in a bullish trading channel since the beginning of 2017. The ratio is considerably higher than it was when gold bottomed in 2015.