Here’s What Needs to Happen Before Gold Prices Rise

September 1, 2022No Comments

Hello, and welcome once again to the Smart Money, Dumb Money Show and I am your host, as always, Keith Richards. I am president and chief portfolio manager at ValueTrend Wealth Management. Today, we’re going to cover gold. I’ve covered it a couple of times before, but I’m going to cover it from a little bit of a different perspective. You might find it interesting. I also wanted to note for regular followers of this video and of my blogs that I will be doing and “ask us anything” blog with my co-manager here at ValueTrend Wealth Management, Craig Aucoin, and we’re going to be answering questions, your questions, in fact, regarding the fundamentals and technicals on stock sectors, the markets, commodities, whatever it is you have in mind. Now, if you want to answer, sorry, I should say if you want to ask one of those questions that have been bouncing around in your brain for a while, you need to go to the blog that I posted on Monday.

Gosh, I don’t remember the date. The wonders of Zoom technology, I stopped the recording and I looked and actually it was Monday, August 29th. So go to the blog that I posted on Monday, August 29th. And it’s entitled “Ask Us Anything” and you can post a question to that blog. You have to have your questions in by the end of the month, September the fourth, I believe it is, is the deadline on the Sunday. And then we’ll try to do the video the following week. So look out for that. So let’s get right into the question of gold and where we stand on gold right now. At ValueTrend, we do have a position in gold. We have a small position in the bullion and another position in a producer stock. And I will disclose, because we’re going to be talking about that specific stock, that we own Barrick gold.

Now it’s not necessarily a recommendation to buy Barrick. It just happens to be the biggest producer. So we do own Barrick simply because it’s kind of the big guy in the group. So I wanna talk about the outlook for gold. It’s been a bit of a disappointing trade. It’s not been horrible, but most certainly hasn’t been our most profitable trade of late. So why would we continue to hold it? So I’ll go into some of the reasons. We’re not heavily invested in gold, I should point out, but we’re keeping it as a bit of a hedge and you’ll see some of the reasons we don’t mind the trade. So let me share the screen.

I’m going to go right into a bit of a PowerPoint that I put together here, and we will start from the beginning. So let’s take a look at gold bullion to start off with. And what you can see here is, this is just going back in 2018, but really since 2020 bullion has been very sideways. It’s got some support around the old breakout point. If you remember going back, a number of years ago, gold was trapped below 1650, and it did break that. And now 1650 is acting as support. So it seems to bounce between 1650 and let’s call it $2,000,somewhere near there. That’s been the pattern since 2020. Now, one of the things that we need to understand when we look at gold, gold is not like buying a company or a stock. A company goes up because it’s earnings are going up or it’s anticipated earnings are going up and the crowd moves into the trade.

So that’s where fundamentals and technicals blend is there’s either some hype behind it and that’s the technical side that can measure that or there’s some reality behind the anticipation of future earnings. One way or the other gold is different than that, because it’s really only looked at as a hedge against the US dollar. There’s no real point of gold. Sure, there is some use of it for jewelry making and things like that. In fact, one of the seasonal cycles that we’ll talk about later happens to be from the summer to the fall because there is still some movement from gold usage during the summer springtime as Asian and Indian gift giving and wedding seasons begin and gold usage picks up. But for the most part the bullion itself is going to move because of the dollar.

So I wanna take a look at the US dollar because it’s considered a bit of a hedge against a declining dollar for whatever reason. So first of all, I wanna make note that going back to 2003, when we saw a peak on the US dollar, we are coming right back to that level right now. So the question is, will it go through the old highs? There has been a flight to safety between COVID and you know, all the things that have been happening with the Ukraine war and just all these different factors have pushed money into the US dollar. And this is on a world currency basis, this chart right here, so it’s not against the Canadian dollar. But what I want to look at now is the relationship between what gold does and what the dollar does. So the black line here is gold and the red line here is the US dollar.

And you’ll notice a lot of the time, for example, here, I didn’t make note of it here, but you saw gold declining and the US dollar rising. You saw gold rising while the US dollar was pretty choppy and heading down. Here, you see a very obvious example in 2003 to 2006, roughly where the US dollar was declining and gold was increasing. It was a flat period in here where they more or less moved together. But then we started to see that inverse relationship again, between 2018 and 2020, where gold rose and the US dollar fell. And now we see the opposite again. We see the US dollar rising and gold has been weak to sideways. So this line down here is a correlation line and zero correlation means there’s no correlation, but you can see most of the time the two are negatively correlated.

In other words, most of the time the relationship is below the zero line, meaning that there is a zig and zag type of occurrence when one is moving strongly in one direction or the other. So when we go back to that chart we just looked at, the US dollar is getting close to a significant high point. Will it break that? Well, let’s answer that question with maybe looking at a long term momentum indicator. Now this doesn’t necessarily answer the question, but this certainly addresses the question. The rate of change is a very simplistic indicator. Now what I’m using here is a monthly chart and I’m using a 12 month look back and it simply looks at what percentage did the security in question, in this case the us dollar, go up or down over the past 12 months. And it’s constantly doing this on a month by month basis.

And we can see when the price percentage moves up too much, the price movement moves up too much, we tend to get an over bought situation and the potential for some weakness and vice versa. Okay. So we have, you know, different times when the US dollar was getting over bought, had moved too quickly and did experience a decline when that rate of change peaked. So you can see that we are kind of at one of those points where the rate of change is near a high point. When you look at momentum indicators, you will find that you need to look for a rounding over before you just say, oh, that’s over bottom out. You don’t do that. But if you do start to see a rounding over of rate of change, that means the momentum is changing. The price momentum is declining. And that means it’s probably going to be a nasty ride down. That hasn’t happened yet, but it’s something we should keep our eye on because rate of change is high for gold.

Okay. So gold stocks, unlike the bullion are not trading sideways. In fact they were, but they’ve broken down and you can see that in the chart. You guys probably follow me enough to know that this would be a support line and you can see that line has been broken. So that’s kind of nasty. So the question is why? Well, one of the real reasons that we’re seeing this is because first of all, the markets themselves have been pretty rough. The stock markets and producers are stocks so they’re going to get dragged around with stocks. But the other reason is because shorters have decided that they don’t like gold, especially because the US dollar has been heading up. So you can see these are spikes in short interest on Barrick gold and I mentioned, we own a bit of Barrick. I think it’s only a 2 or 3% position, but we have some Barrick gold.

And so I have to disclose that here. So you’ll notice that on Barrick gold, in 2013, there was a spike, 16. At the end of 2018 shorts went crazy on it and then quickly declined. And then here we are again, we have a very high short interest on gold. Well, let’s take a look at what happened on Barrick’s stock during those periods. There’s 2013, where there was a spike in shorts and it rose a little bit. Gold did find a bit of a bottom there. Most certainly in 2016, we were coming into that year with a very high short interest. And you can see gold rose a lot after that as the shorts had to cover. Same with 2018. You can see that right here, right at the end of 2018, exactly when the spike was, you know, you got a really nice bottom and quite a move on gold after that.

So here we are 2022, we do have kind of a spike on the shorts. The question is, will Barrick turn around when the market finds a reason to start covering the shorts when the short sellers have to start covering. And I guess the only answer to that question is, again, going back to the dollar chart. So when you see momentum roll over on the dollar you just may see gold start to move and therefore, you may see that the producers like Barrick may have to start covering their shorts, the investors that have been shorting the stock and it becomes this self fulfilling prophecy. So that’s one thought is the shorts. The other thought that I thought I would present to you is the optics, which is from sentimenttrader.com. A great website and a great service, pretty cheap to subscribe. I hardly endorse their services.

They cover all the sentiment indicators and on optics is just a look at all the different sentiment indicators from Smart Money, Dumb Money to, you know, VIX and all the different types of indicators that they will look at that tries to measure sentiment, investor sentiment on, in this case gold. And you can see same periods of time. So here we are, we were looking at the shorts on Barrick; 2013 sentiment was very pessimistic on gold and you saw what happened. In 2018, it was fairly optimistic on gold. So that was not a signal,  because we wanna buy when people are pessimistic and that most certainly was not the case, even during that big spike in 2000 and, this should say 2016, that big spike in shorts in 2016. So please ignore this number. It should say 2016, don’t know why I typed that. This is 2018.

There’s the end of the year. You can see right at the end of the year there. And most certainly there was a large feeling of pessimism on the optics and boom, it turned around and here we are again. We’re in that highly pessimistic zone. So investors don’t like gold and the shorters are all over it and the US dollar is high. So there’s probably good reason for it, but I think it all comes down to what’s the dollar going to do, and all of this picture could change. So this is, one last thing is seasonality. Seasonality has not played its way out in a typical fashion this year because typically gold rises from around July and into September. Well, that’s most certainly not happened. Gold has been the dog’s breakfast, another period of time that, gold, and ETF stocks can do.

So this is using the iShares XGD ETF. And you can see that the early part of the year you can often see a seasonal spike, but I’m not going to place as much credence on seasonals with gold this time, especially with the US dollar. Again, I think it’s all about the US dollar right now. So let’s just do a quick conclusion on what we just looked at. Gold bullion, itself, is just pretty much sideways. It’s actually not been a bad place to be. We don’t mind holding the position, especially because the stock market went down a lot and gold kind of went sideways. Gold stocks, though, have broken down and we have that bear position. So will gold stocks play catch up to the bullion, which has basically stopped being such an underperformer. Well, you know, you do have a lot of shorts and that’s pushed the price down of the stocks.

We’re looking at Barrick, but the same situation is occurring on a large number of the major producers. And sentiment is very low. Like people hate gold right now. And so we’re, these are actually kind of contrarian indicators because if there’s too many shorts and there’s the too low sentiment on a particular sector or stock, it often gets washed out and then you’ll see some sort of a turnaround. The question is when? So seasonality is not good during the fall to early winter period, though seasonally really hasn’t worked in the period that it’s supposed to be good, which is kind of right now. It can be good in the new year. And finally, again, I want to drive this home that I think the biggest catalyst for gold will be the US dollar. And I am seeing an over-bought US dollar.

I think most of you would agree the US dollar has been maybe on too much of a tear and it could be vulnerable to any kind of a correction. So that’s the reason I hold a little bit of gold is that it’s largely been sideways except for the Barrick that we own, but it’s been a sideways play. And we do feel that with such an oversold position, we’re going to possibly see a turnaround if the over bought US dollar sees some sort of a peak. So I wanna just remind you guys that I’m speaking at the Money Show on Saturday, September the 17th. And I will be speaking at 4:30 and at the Metro Toronto Convention Center. And I do hope to see you there. I’ll be talking about my favorite subject, which is contrarian investing. And it’s a presentation that I put together for the Canadian Society of Technical Analysts.

So it’s not a flaky sort of shallow presentation. I am going to make you think, and I’m going to challenge some of your assumptions. So it will be interesting. In fact, it may be a little bit controversial. So I’m going to leave you with that. And I do hope you can come out to the money show because it’d be fun to meet you. And I think it’ll be fun to see how my presentation goes over when I challenge conventional beliefs. You have a great day and we’ll be back, I hope in about a week or so with the “Ask Us Anything” answers video, and you really don’t wanna miss that. Thanks for watching.

 

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