GS: S&P Sector performance 2022, Tesla, Rates in LATAM, and Put/Call Ratios
TD: Weekly Big Three data points
Market Rundown:
Good Afternoon. Markets remain closed globally for the remainder of the New Year Holiday. This week’s data will likely focus on Friday’s NFP.
MONDAY DATA
New Year holiday. None scheduled.
Yellow Line: Gold and Silver holding their own in rate hike regime thus far despite volatility.
Blue lines above: Ever wonder why gold rallies hard in supportive environment, gets ahead of itself, invariably smacked down, then seems to be kept in line despite the supportive situation continuing for a while longer?
It was back in the early 2000s, at the beginning of my career.
Any good technician was a gold bug back then, as the per-ounce price went from about $200 to above $2,000.
What’s funny is that over the past decade or so, I’ve come to be known for hating on gold.
My twitter feed was full of “barbarous relic” jokes in the middle of its downtrends.
But gold is on the verge of a new secular bull market.
And here I am, buying it very, very aggressively.
The question I’m asking this time is, why can't it go from $2,000 to $20,000? There’s something about gold.
Perhaps it’s the fact that, unique among commodities, it isn’t consumed in any of its intended uses. Once it’s pulled out of the ground, it’s around forever.
And people have been fascinated by it for literally millennia. We’ve used it for decoration, as money, and to make jewelry. It even has industrial applications.
And its “store of value” characteristics in a world powered by fiat currency are well known.
At the same time, I know very little about central banks. I couldn’t explain “quantitative easing,” “quantitative tightening,” and/or “yield curve control.”
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I understand that macroeconomics and geopolitics are important. But, again, I’m no expert on either one.
My thing is price action. And price action is telling me something important about gold right now.
We’ve looked at the most important charts. We’ve identified the critical support and resistance levels.
We’ve studied intermarket relationships. We’ve done the math. And we’ve come up with a price target.
It’s a big one.
The key is gold is on the verge of a new secular bull market. Yes, I used to be a gold bug.
Now I'm back.
And here’s why.
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The Case for $5K Gold
It’s been two years since gold hit new all-time highs.
And, while it hasn’t gone anywhere since, it has remained buoyant.
As frustrating as this range-bound market may have been from a trading perspective, it has revealed an impressive amount of underlying demand.
It’s the epitome of a correction through time as opposed to price. And the price has been right for commercial hedgers as they recently held their smallest net-short position in three years.
The red line in the lower pane represents commercial hedgers:
Their positioning reached levels corresponding with significant bottoms for gold in 2016 and 2018. This doesn’t necessarily mean a bottom is in for gold, but it does imply the stage is set for an explosive rally.
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An unwind in commercial positioning will likely spark the next sustained rally in gold. And, considering the run precious metals have enjoyed off their lows from this fall, maybe it’s already starting.
It’s hard to ignore the near-term strength. Precious metals have received plenty of attention in recent weeks, and rightfully so. Gold has reclaimed a critical level of former support, and silver just printed fresh six-month highs.
Both of these charts have ripped back into their former ranges, reclaiming key shelves of former lows.
This was step 1, as the damage to the primary trend must be repaired before any meaningful upside can occur.
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Now we’re looking for prices to head back to the upper bounds of these consolidations eventually. How long that takes, we don’t know. However, we have a long list of data points we can use as leading and confirming indicators to give us an idea of what direction we’re headed.
By the time these charts take out their former highs, the bull market will be well underway, and we’ll have plenty of evidence to back our position.
Long story short, we think Gold and Silver are ready to run higher, kicking off a new secular bull market for precious metals. But before we can be confident of a new bull run in gold, we must witness some base breakouts.
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Here’s the big picture…
Gold has been a hot mess for a decade:
The same was true leading up to the 2004 breakout 0- a big hot mess of a bottoming process.
Gold traded at 425 in early ‘04, and by the summer of 2011, it nearly hit 2,000. That’s roughly 350% upside!
Imagine if gold makes a similar run in the coming decade, that would put spot prices near 9,000.
First, of course, it has to reach 5,000. It’s basic math, but it could come sooner than many expect.
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Can you imagine Silver trading at 100, or even 200?
Once silver reaches new all-time highs it’s going to rip, but it has a long way to go.
We don’t think it will be a problem since it’s prone to explosive rallies. And if gold is making its way toward 5,000, Silver likely prints fresh all-time highs somewhere along the way.
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Despite platinum trading beneath a decade-long downtrend line, we have to imagine a trend reversal takes place sooner rather than later.
Check out that massive 7-year base! We expect the trendline to break soon and platinum to take out its 2020 highs, completing this rounding bottom reversal.
Remember, it always comes down to price action. It’s impossible to claim a new secular bull for PMs if price isn’t trending higher. But it’s the near-term strength and burgeoning risk appetite across precious metals space has our full attention.
We think we’re in the early stages of an epic rally for these rocks and their associated stocks. So we put together a road map consisting of data points that will inform our bias – either adding to our bullish conviction or suggesting patience as the new bull market to develops further.
Let’s dive in!
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PRECIOUS METALS Checklist:
● Gold breaks out of its decade-long base to fresh all-time highs ● Silver reclaims its 2011 lows
● Gold outperforms other major asset classes (Bonds, Stocks, Commodities)
● GDX and NEM complete massive reversal patterns
● Precious metal stocks outperform
● Junior miner outperform the larger counterparts
● Silver outperforms Gold
● Dollar weakens and Real Rates rollover
We’ve already laid out what Gold and other precious metals need to do regarding price on an absolute basis. Let’s run through all the developments we expect to unfold if the above breakouts are the real deal.
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PRECIOUS METALS Gold Outperforms Major Asset Classes
When assets are in strong uptrends, they don’t just do well on an absolute basis. They tend to outperform their alternatives.
We expect no difference from Gold if it breaks to fresh all-time highs. That means gold is completing a monster base relative to bonds:
The GLD/TLT ratio is carving out a decade-long bottoming formation that appears quite similar to an absolute price chart of Gold.
An upside resolution in this key intermarket ratio is at the top of our checklist. Any breakout in gold should be considered suspect without a similar breakout relative to bonds.
While we don’t need to witness relative breakouts versus stocks and commodities, we need critical levels to hold.
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Notice Gold finding support versus stocks at a polarity zone going back to the early 2000s:
This is a logical level for Gold to dig in on relative terms. And it has, so far.
Again, if Gold is amid a new secular bull, ripping higher toward 5,000, it outperforms the S&P 500.
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PRECIOUS METALS It’s the same story for Gold versus commodities.
Like Gold vs. Stocks, Gold is bouncing off a logical level of support relative to commodities. It’s not a coincidence that these relative trends are beginning to favor Gold.
After two years of trending sideways, Gold and other precious metals are beginning to show near-term strength. But before we can get behind a bullish thesis with conviction, today’s relative bounces versus the major asset classes need to become tomorrow's sustained uptrends.
Gold squarely outperforming bonds, stocks, and commodities will confirm the next secular bull for the shiny yellow metal.
When we drill down by focusing solely on the precious metals space, we expect money will flow to the high beta areas – mining stocks and silver.
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PRECIOUS METALS Miners Join the Party
If Gold is on its way to 5k, one thing we know for sure is gold mining stocks will be participating. If gold prices rise, companies that remove gold from the ground and sell it will surely benefit.
Here’s a look at the PHLX Gold & Silver Index (XAU) which is comprised of the 30 largest precious metals miners listed on US exchanges.
As long as we’re above that former resistance turned support at the 2016 highs, the bottom is in for these stocks, and a new mark-up phase is underway.
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PRECIOUS METALS Here is the VanEck Gold Miners ETF (GDX) looking back over the past decade.
As GDX and XAU are comprised of many of the same components as well as a similar cap-weighted structure, these charts look very similar. We anticipate GDX will soon follow the same path as XAU above, and reclaim this key level of interest at the 2016 highs and pivot lows.
30.75 is our line in the sand. If we’re above there we can use GDX as a vehicle to express our bullish thesis on gold.
Our first objective is 46, and our secondary target is the former all-time highs just under 67. That represents a roughly 50% gain initially and better than a double in the event we hit our second target.
We like the idea of buying GDX as there should be more juice -- or beta, in miners than in spot gold. And because it is a fund, it gives us diversified exposure, reducing the company-specific risk that accompanies capital intensive industries like mining.
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We’ll go over more options for investing in gold and silver miners throughout this report as well as some individual names at the end.
This next chart illustrates the idea that miners should offer more beta and outperform during bull markets. Here is GDX vs the S&P 500:
In the last section, we described how gold should outperform its alternatives in a true bull market. The same is true for gold mining stocks. This chart will be moving up and to the right, just like it did during prior cycles, if gold is on its way to 5k.
The failed breakdown at the lows from 2015 and 2018 is a great way to kick start a new uptrend in this ratio. We think it is already underway as gold mining stocks have shown significant relative strength since the dollar peaked in September. We’ll talk more about the dollar lately, don’t worry.
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Another thing we’re looking for if this is a new bull market for precious metals is the industry leader and largest gold miner in the world - Newmont Mining (NEM), to finally resolve higher from its massive base. Here’s what it looks like.
NEM has experienced a 50% drawdown this year after failing to hold its fresh all-time highs back in April. First, we’re looking for it to reclaim its pivot lows around 53. It’s tradable above there. However, the real breakout takes place above 72.50.
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The large basing pattern is quite similar to the one in gold futures. Here’s a look:
If gold is reclaiming its former highs, Newmont should be too.
Let’s talk about silver miners now. There is a lot more work to do for gold’s crazy cousin, silver. The same is true for silver stocks.
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SIL hit a max drawdown of roughly 60% from its highs in late 2020. In recent months though, it has managed to rally almost 40%, and is currently fighting to reclaim its 200-day moving average. We really like the short-term momentum from these stocks.
It is important to see the riskier assets in the precious metals space outperform during uptrends. This tells us that investors are embracing risk and moving out on the risk spectrum in order to achieve excess returns.
Silver and silver miners are some of those riskier assets. There is more on this throughout the report.
Gold miners should not just outperform the broader stock market, they should also outperform spot gold. This is particularly true during the early stages of new bull markets for precious metals.
The GDX/GLD ratio will be heading higher, and is likely to break out of this decade-long rounding bottom pattern, if gold is headed to 5k.
And when we think of the risk spectrum for precious metals, of course the junior gold miners are riskier than the gold producers.
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Many of these junior mining companies are still in the exploratory phase of business, unlike the producers which have measurable gold assets on their books already. Naturally, this makes them highly speculative investments.
Think of junior gold miners as biotech companies, and the producers as big pharma. If and when they find gold, the larger players in the space will partner up and provide capital for mining, or simply buy them out.
The juniors should outperform the producers just like we’ve seen during past cycles. This chart is already showing evidence of a bottom as price made its low way back in July and is currently threatening to violate a multi-year downtrend line. GDXJ/GDX should head back toward its former highs in the 1.50s if this rally in gold is the real deal.
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And it’s the same exact story for silver juniors and producers. Here is the relative trend in SILJ/SIL:
A base is breaking out in this ratio, and a fresh leg higher validates our bullish thesis for precious metals.
The information we’re looking for from these ratio charts is all about risk appetite. If these relative trends catch higher, the most risk-on and offensive investments outperform as investors move out as far as possible on the risk curve.
This behavior is a characteristic of bull markets in all asset classes, not just precious metals.
Let’s build on this theme now by discussing the silver/gold ratio. 21
PRECIOUS METALS Silver/Gold Ratio Catches Higher
If investors reap the rewards for owning gold and other precious metals, their willingness to incur risk increases. We’ve already made that clear.
What this means for gold’s crazy cousin, silver, is that it too, should outperform during the next bull run.
Hi Ho Silver…
The overlay chart of our precious metals index and the silver/gold ratio highlights the strong relationship as both charts peak and trough in unison.
When silver outperforms gold, precious metals do well. On the other hand, when Silver fails to catch a relative bid, the entire space lacks strength.
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The recent rally in this key risk ratio caught our attention due to its bullish implications. Notice the ratio completed a near-term bottom before Gold violated its year-to-date downtrend line. And now both trend higher.
If these breakouts have legs, we expect more of the same in the coming weeks and months. So far, the bulls are in control as the silver/gold ratio challenges fresh 52-week highs.
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But when it comes to our checklist, it’s the multi-year inverted head & shoulders we’re concerned with:
This massive reversal pattern will resolve higher if Gold trades above 2,500 and Silver challenges its 1980 highs. The precious metals space will offer plenty of opportunity beforehand, but a decisive trend reversal in this critical ratio will seal the deal for our bullish thesis.
But before gold and silver reach these major breakout levels on absolute and relative terms, they will need a boost. That brings us to the catalyst that will launch the next secular bull run…
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PRECIOUS METALS Real Yields & US Dollar
It’s well-known that gold enjoys a weaker dollar. But Gold likes falling Real Rates just as much, perhaps more?
Check out the US 10-year Real Yield overlaid with the price of Gold:
Two things to keep in mind: the Real Yield is calculated by subtracting the expected inflation rate from the nominal yield, and we invert the Real Yield to move in line with Gold.
Notice Gold is moving tick for tick with the chart above. So, in other words, as Real Yields are falling (black line rising), Gold catches a bid. However, when Real Yields are rising (black line falling), Gold gets sold.
If Real Yields keep falling, the markets will continue to reward gold investors.
We can say the same for the dollar. Since the US dollar index DXY peaked in late September, Silver has been the best-performing asset during the trailing three months.
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PRECIOUS METALS Check out the performance chart going back to Sept. 26th:
The iShares Silver Trust SLV is up more than 30%, and the SPDR Gold ETF GLD, a modest 11.50%. We expect the near-term strength in precious metals to develop into a structural uptrend as long as the dollar continues to fall.
A weaker dollar is a non-negotiable component of our checklist. It’s impossible to overstate its importance. Without it, gold won’t print fresh all-time highs, let alone 5,000. It’s that simple.
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Check out how Gold futures and an inverted DXY chart peak and trough together at major turning points all the way back to the early ‘80s.
We don’t believe this is a coincidence or that this relationship will decouple anytime soon.
Instead, it’s more a question of a potential failed breakdown on the inverted DXY chart and a subsequent face ripper.
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Gold and other precious metals will thrive in that environment as a falling dollar will fuel the next bull run for these shiny rocks. It already has!
While the US dollar is in the hot seat, let’s consider Gold a currency.
Unlike other commodities, Gold is mined, refined, and then enters the system for eternity. So the typical forces of supply and demand do not apply to Gold.
And when we compare it to other major currencies, it has held up the best during the US dollar rally this year.
Notice the yen, Swiss franc, euro, pound, Aussie dollar, and Canadian dollar continue to churn below their per-covid highs from early 2020. On the other hand, Gold trades above its respective highs, highlighting its relative strength.
In reality, Gold is already in a new secular bull market – just not denominated in US dollars.
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PRECIOUS METALS Here’s Gold priced in Turkish lira, for example:
Gold has been in a structural uptrend versus the lira since 2016. Putting the lira in the denominator might seem obnoxious, but the Turkish lira is not the point. It just provides an excellent example of gold prices outside the US.
Gold only viewed in USD presents an incomplete picture.
Yes, the USD dominates global trade. And yes, we want to witness a break to fresh all-time highs priced in US dollars. But when we look around the world at other major currencies, Gold has already broken out!
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PRECIOUS METALS Here’s Gold priced in Euro:
It reclaimed the 2011 highs during the covid sell-off. Aside from a couple retests of those prior highs, it hasn’t looked back, as it recently printed fresh all-time highs in March.
It’s a near-identical picture priced in British pounds:
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A big base breakout in early 2020, followed by retests in the spring and summer of last year. Unlike gold priced in USD, these breakouts have held as the uptrends remain intact.
The next secular bull run in Gold is well underway in Europe. And Japan?...forgettaboutit!
Gold nears fresh all-time highs priced in yen – no surprise! But you get the point. The list goes on and on…
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Here’s a quad pane chart of gold priced in key commodity currencies – the Norwegian Krone, Aussie, Kiwi, and Canadian dollars:
It’s the same story no matter where we look.
Gold priced in every major global currency trades above its prior cycle highs from 2011 – except the US dollar. We think it’s just a matter of when, not if, gold parties in the USA!
Before we lay out our plans to celebrate, let’s review our checklist again:
● Gold must break out of its decade-long base to fresh all-time highs ● Silver trades above its 2011 lows
● Gold outperforms other major asset classes (Bonds, Stocks, Commodities)
● GDX and NEM complete massive reversal patterns
● Precious metal stocks outperform
● Junior miners catch higher versus larger mining stocks
● Silver outperforms Gold
● The Dollar slides and Real Rates fall
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To be clear, we’re not going to sit around and wait to check all the boxes mentioned above before taking action. Instead, we want to use our checklist as a road map, constantly weighing the evidence and confirming we’re on the right path.
Now with the backdrop and catalyst for the next leg higher in precious metals laid out. Here’s how we want to ride the next secular bull in precious metals:
Futures and Physical ETFs
First, we have Gold futures:
Depending on your risk tolerance, you can either get long against 1,678 or wait for a decisive close above 1,924.
Regardless, targeting 2,466.
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PRECIOUS METALS Here’s a look at the Gold Shares ETF (GLD):
We like GLD long above 157 with an initial target of 185 and a secondary objective of 238.
Next, Silver futures:
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You can play silver two ways: either buy weakness towards 21.85, or wait for a decisive move above 26. Both levels are acceptable for defining risk.
Either way, we have an initial target of 30 and a long-term objective of 35. But once it breaks 30, we expect to witness fireworks similar to the summer of 2020. So be prepared!
If you don’t trade futures, the Silver Trust ETF (SLV) provides an excellent alternative:
As long as it’s above 20.50, we like SLV long with an initial target of 26.50 and a secondary target of 35.
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PRECIOUS METALS If Gold and Silver are off to the races, then Platinum shouldn't trail far behind:
Yet gold and silver have reclaimed critical levels of interest while platinum has not.
Nevertheless, if and when bulls reclaim the 1,226 level, we want to buy on strength with a target at approximately 1,638.
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We're betting on a structural trend reversal in The Physical Platinum ETF (PPLT).
The most recent outperformance in the precious metals space supports this outlook.
But we can’t own PPLT until it’s above 113. Once it’s above there we’re targeting 142.
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PRECIOUS METALS Gold Mining Indexes and Stocks
Here’s the Gold Miners ETF (GDX):
GDX is in the process of reclaiming a shelf of former highs. As long as it’s above this polarity level of 31, we want to be long with a target of 46.
And if gold prints fresh new-all time highs, we expect GDX does the same. 38
PRECIOUS METALS The Silver Miners ETF (SIL) is breaking out of a multi-month base:
We like SIL long above 27 with an upside objective of 33 and secondary target of 40.
These are two ETFs that can give us exposure to a basket of Gold & Silver mining stocks.
Now, if you're interested in taking this one step further, and would like to access all of the individual stocks and price targets, just email us here.
By contacting us, we will know that you’re as serious as we are and can provide you with the information to set up your access to all our favorite Gold & Silver trade ideas. These are all the stocks, all the ETFs and even options trades that will profit in an environment where Gold is heading to $5000/oz.
Let us know what you think!
Thanks for reading.
- JC Parets & Team Allstarcharts
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Disclaimer
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