The precious metals sector seems to be set up technically for another big bull-cycle move, in the context of a secular bull market that began in late 2000/early 2001.
Certainly, the fundamental underpinnings are stronger now than at any time in the last 23 years. In this article, I’ll review a series of charts that support my view and discuss the fundamental factors.
What the data shows
The chart above probably looks familiar. The precious metals investing cohort has been watching the massive cup/handle formation for the better part of two years.
Though not always the case, this technical formation is often a powerful bullish setup that “resolves” to the upside and comes before an extended move higher. Gold is now on its fourth attempt to push through the $2,100 an ounce threshold and into all-time high territory. It has already done this if you look at the gold pricing in several other fiat currencies.
The chart above shows the gold/S&P 500 (SPX) going back to 2000.
It is a measure of the relative value of gold versus the stock market. After pulling back to the level from which gold made a strong move versus the stock market in late 2005, this ratio has fallen back down to that breakout level and appears to have successfully tested it for the third time since late 2018.
I believe that ratio will move higher from here, with gold outperforming the stock market.
Gold versus stocks
The chart above shows the gold/SXP ratio vs the S&P500. It’s another way of showing the relative value of gold to the stock market. After outperforming the stock market by a wide margin from late 2008 to late 2011, the price of gold entered a 4-year bear market in which gold underperformed stocks.
Markets eventually “regress to the mean.” In this case, I believe the price of gold will either rise at a faster rate than the stock market or gold will rise while the stock market corrects its extreme level of overvaluation.
Regardless, the chart above suggests to me that the precious metals sector is setting up to launch.
A look at precious metals mining stocks
What are the mining stocks telling us about the potential for a bull move in the sector?
The chart above plots the Amex Gold Bugs index: SPX ratio relative to the price of gold from 2000 to the present.
I’m using the HUI because I wanted to take the chart back to the start of the precious metals bull market and GLD did not exist until 2006. The chart shows that not only are the mining stocks cheap relative to the general stock market, but also that the mining stocks are cheap relative to the gold price.
As with gold relative to the stock market, I believe the HUI: SPX ratio is set up to “correct” higher, thereby closing the valuation gap between mining stocks and the price of gold – and silver, for that matter.
Speaking of silver, the metal has been underperforming compared to the oftentimes frontrunner, gold, since early 2011. If gold launches, it will pull silver along with it. However, if history is a reliable guide, silver will eventually outperform gold and ultimately, the mining stocks will outperform both monetary metals.
The fundamental factors underlying the potentially bullish technical set-up reflected in the charts above are more powerful in support of the precious metals sector than at any time in the last 23 years.
A look at the factors affecting prices
These factors include a record high level of debt relative to wealth output globally, particularly in the United States; a global recession (though not officially acknowledged as such) that is about to become more severe, particularly in the United States and Europe; and escalating geopolitical risk.
In addition, there is the lingering, relatively easy central bank monetary policy, led by the Federal Reserve. Though the Fed has hiked its base interest rate to 5.5%, using a real gauge of inflation (as opposed to the interminably massaged CPI), real interest rates are still negative.
Using the method of calculating the CPI that was used in 1980 (when the Fed began altering the inflation calculus), actual inflation is around 12%.
This implies that the real rate of interest is -6.5%. Negative interest rates are like rocket fuel for the gold price. The market still buys into the CPI fairytale but when it starts to price reality into the markets, the precious metals sector should launch.
While the Fed is making a feeble effort to reduce its balance sheet as it tries to remove some of the excess trillions of liquidity from the banking system that it put in starting from 2008, it has implemented less visible liquidity facilities to return some of that liquidity to the financial system.
Examples include the $400 billion in regional bank bailout funding as well as the ongoing Bank Term Funding Program. The Fed also has a $500 billion currency swap facility with the European Central Bank from which the dollars swapped for euros end up being recycled back into the U.S. financial system.
As it has done several times since the mid-1980s, I expect the Fed to reverse its Quantitative Tightening policy and revert back to aggressive money printing to address a rapidly deteriorating economy and severe problems that have crept back into the banking system, to help fund massive new debt issuance by the U.S. Treasury.
When the money printing press fires back up, with respect to the precious metals sector: “Look out above.”
Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis. The opinions expressed in this article, do not purport to reflect the official policy or position of Kinesis.
Read our Editorial Guidelines here.