Why gold may be bullish in August

August 2, 2021No Comments

Well, hello and welcome once again to the Smart money – Dumb money show. I’m your host, Keith Richards, I’m Portfolio Manager and President at ValueTrend Wealth Management. For those of you who follow my blog regularly, which is www.valuetrend.ca, you will have found a recent update on the potential for markets to perhaps be a little soft in the month of August. Now I outlined four reasons behind why I feel the markets are possibly going to either sell off or trade sideways during the month of August. And the question as to what we should be doing in light of that from an investors point of view is going to be discussed a little bit today. Now, obviously whenever we have a correction, we have to decide, well, what’s the potential of that correction, both in the probability of it actually happening and number too in the extent of the correction.

So the write up on the blog covers that potential, but just in a nutshell, based on the factors that I am looking at trend breadth, money flow are reasonably good. Breadth is a little bit off with concentration in a number of stocks, but generally speaking macro conditions aren’t bad on the market right now. But my concerns revolve more around seasonality and some diverging momentum indicators, as well as a tendency for markets to get a little jittery coming into the Jackson hole meeting, which is near the end of August. So all of this suggests that any correction that we get is going to be relatively minor, and yet there’s a reasonable probability of a correction happening. It might only be 5%. It might not be anything to really write home about. It might be 10%, but I really don’t think it’s going to be a big one.

And yet the probability of some sort of a correction is actually fairly high. So with this in mind, what do we do as investors? Well, first of all, you are probably going to want to have some cash in your portfolio, simply because if it’s a pretty good opportunity or a pretty good probability of that opportunity for correction cash is great to have because you can buy stocks that you were just looking at X level and maybe buy them at Y level in maybe a few weeks. So we’ve done exactly that at ValueTrend, we were at 15% cash. We literally the last couple of trading days of the month, actually the day I’m recording this, we sold a little bit more equity to bring our cash reserves closer to 18 or 19%. We were near 15, so we’re not gangbusters out, but we do feel that there’s a high probability of some sort of a sell-off.

And with that in mind, we raised a little bit more cash. So that’s number one. You might want to have some cash. I’m not going to recommend what level of you carry because that’s an individual choice. But the second thing you can do is look for sectors that might actually do okay in the month of August, because month of August from a seasonality point of view is, is kind of a low return type of month. In fact, often it can be negative. So that’s the second part of today’s video. And I want to go right to a chart and to give away the punchline of this video, I’m going to tell you upfront that there is a reasonable chance for gold and gold producers to do okay. During the month of August. In fact, there’s a seasonal tendency for gold in general, to do well between July and the late fall, sometime in October.

However, the real muscle of the movement tends to hop in July and August. So you’ve already seen gold start to move, and we’re going to look at a chart in a minute, but it’s kind of interesting to see that from a seasonality point of view, you still got some upside in possible tailwinds behind you. The other thing I might point out is that from a sentiment point of view, gold was very oversold a number of months ago, and the optics, which is something that sentimenttrader.com does we’re showing deep pessimism fairly recently, and now it’s picking up. So that again is a sign that there are some investors coming back to gold. You know, again, I’m not a long-term bull on gold. The trade we’ve been doing is more of a temporary trade. We actually expect that we will sell sometime in the next month or two out of our position that we’ve recently just bought. We’re not long-term bulls, but let’s take a look at the chart of the gold producers.

So I’m just going to use the iShares XGD chart, which is the gold Global index of the producers. This is not for bullion itself. And we’ll just start here. You’ll notice that while gold took the beating of a lifetime from around the middle of 2020 to around the beginning of this year, the tendency for gold producers has been to begin picking it up. One of my rules for chart following and trend following is that a downtrend is signified by lower highs and lower lows, which we were definitely getting between mid 2020 and early 2021. But you’ll notice that the recent peak took out the last peak right here. You’ll also notice that the recent trough took out the last trough. So we are effectively in a beginnings of a potential uptrend for gold. And now I don’t trust the gold is going to go into a longer term uptrend like this, but I do anticipate that with the seasonal tailwinds behind it, we could actually see in the producers possibly somewhere in the low twenties, 21, 22 dollars, which from current prices at 19 and a half or so, isn’t a bad trade, especially if you’re in it only for a couple of months or so.

So that’s, that’s one observation on the chart is that we’re making higher, a higher, low, and a higher high, which is basic trend analysis. The second thing is take a look at stochastics, which is the short-term momentum indicator. And you’ll notice it looks like it’s coming off of an oversold level and possibly hooking up RSI similar look. And you’re also getting a nice trend in RSI that it is starting to make some headway. This is relative strength compared to the TSX. So you can still see it’s trending down, but this is MacD and MacD is a bigger picture indicator. And it also is showing some signs of bullish revival. So even the histogram here, you can see this, the blue little blue lines here. We starting to hook up a bit. Now this is very early, as far as the indicators go.

But when I look at the bigger picture with the new high and the new low that are bullish and the seasonality and the optics, my thoughts are that gold, isn’t a bad position for the next month or two. Now, anything can happen. And that’s just the way the stock market works. Perhaps gold will not be a great place to be over the next couple of months. And you have to make that decision for yourself because commodities can be buying in stock. And even though these are producers, they are stocks in this ETF. We’re looking at the nature of gold can be a little bit more violent than some other types of stocks. So, you know, buyer beware, I guess you could say. But my overall view is for a bullish outlook on gold for the next couple of months, a more subdued to possibly bearish outlook on the broader indices over the month of August and possibly into September.

And it’s my view that we want to be reasonably defensive. And yet within the larger environment of a pretty good macro picture, we don’t want to be over the top with our selling out of positions. I think we have to hold some cash, but we need to remain in the market because the bigger picture is good. And the prognosis I’m making right now about potentially a sell off in August may not have been, and you wouldn’t want to be too underexposed to the market if it does continue to rise. So thank you for watching and we’ll see you again next week with another edition of Smart money, Dumb money, just before I leave, I’d like to ask anybody that is watching this video to go to the blog. And there is a survey that I have been posting to get feedback from you on whether I should get a professionally made educational video program in the works.

Now, this would not be me on zoom and in my living room, as you’re seeing me now, this would be a professional studio with professional cameras and sound systems and graphics and quizzes, and everything. There’s six short questions you can answer on the thing. It’s multiple choice on the questionnaire that I’ve posted. I would really appreciate it if you would actually take the time to do this because it’s people like you, that I would be making these videos for, but it would be a few thousand dollars for me to do this. So I don’t want to do it unless I felt it would be something that would be widely desired. So thanks again for watching this and please go to my blog at http://www.valuetrend.ca and answer the quick questionnaire on the educational course program. Thank you for watching.


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