Gold Stocks Very Oversold, But Need Macro Catalyst

No, the Fed pushing out rate hikes with language doesn’t amount to a macro catalyst.

History shows that a macro catalyst for Gold is usually a shift in Fed policy or a correction or bear market in the stock market. These things typically lead to declining real interest rates, which drives Gold higher.  

In 2017 and 2018, we wrote about how the end of Fed rate hikes and move to cuts would be the turning point for precious metals.

In recent weeks and months, we’ve argued that the Fed’s first rate hike would mark the start of the next significant move in Gold. We’ve also discussed the importance of a stock market correction for precious metals

If the Fed does not hike rates for another 12 to 18 months, then Gold and gold stocks cannot resume a bull market without a stock market correction. 

History argues that if the stock market continues to trend higher, then Gold and gold stocks won’t go anywhere. 

Over the past decade, the last four advances in Gold and gold stocks coincided with the previous four declines in the stock market. Gold and gold stocks performed the worst during periods of clean, sustained advances in the stock market (2012 to 2015 and the last 12 months).

S&P 500, Gold vs. S&P 500, GDX vs. S&P 500

In other words, easy monetary policy is not bullish for Gold when rates cannot move any lower, and the stock market and the economy are trending higher.

In the scenario in which the Fed does not hike for another 12 to 18 months, then precious metals would need an acceleration in inflation expectations to the degree that it would cause a stock market correction and redirect capital into Gold and Silver.

The other bullish scenario would be the economy falling into a double-dip recession.

These potential catalysts aside, the gold stocks and, in particular, the juniors are very oversold.

Below, I plot GDXJ and a few proprietary indicators, including the corrected new 52-week lows. As you can see, the last time GDXJ was this oversold was roughly three years ago and roughly six years ago. 

GDXJ & Breadth Indicators

Earlier this week, I covered my hedge as the odds of a false breakdown in GDXJ and the HUI were increasing, and the potential of the Fed going dovish today could spring a rally.

The sector remains very oversold, and this rally could have legs.

However, one of the aforementioned macro scenarios is required for a real bull market. If the stock market continues to churn higher over the months ahead and into 2022, this rally will eventually fizzle out. 

As per my article from a few weeks ago, I’m focused on finding the producers and developers with 7 to 10 bagger potential over the next two to three years. There is lower long-term risk as these types of companies can add value irrespective of metals prices. And the recent decline in the sector has priced out most of the risk in some of these stocks. 

In our premium service, we continue to identify and research those companies with considerable upside potential over the next 24 months. To learn the stocks we own and intend to buy, with at least 5x upside potential after this correction, consider learning more about our premium service.