Watch These 3 Key Indicators for Gold

Gold has successfully broken out as it closed the month and quarter well past 6-year resistance. It also confirmed the breakout when priced against foreign currencies.

With that said, there are important indicators we can watch to help us monitor Gold’s health and the sustainability of this move. 

Sure, we can watch the Gold price every day but other indicators will speak to the underlying health of the market. 

With that said, here are three things you should watch.

The first is Federal Reserve policy. 

This recent strength was driven by a fundamental catalyst, which we had written about for nearly 18 months: a shift in Fed policy. 

Gold stocks often bottom with an end to rate hikes and then they begin to launch higher as the Fed begins rate cuts. Over the past 65 years and in 11 of 13 rate cut cycles the gold stocks averaged a return of 172% with a median gain of over 100%. 

So far things are on script. But we have to continue to anticipate Fed policy as only one rate cut appears to be priced in. Gold should continue to move higher if the Fed cuts rates multiple times.

The second key indicator to watch is the yield curve.

A steepening yield curve is usually bullish for precious metals because it reflects either rate cuts (and risk aversion) or rising inflation expectations (and inflation). 

During the previous two downturns, the yield curve steepened as the Fed began to cut rates. That was the point when Gold’s relative performance accelerated. Should the Fed cut rates multiple times then the yield curve will likely steepen and Gold’s relative performance should strengthen. 

Yield Curve, Fed Funds, & Gold/S&P ratio

Finally, you should always keep your eye on how precious metals are performing in relative terms. In order for Gold to sustain a real bull market, it has to outperform the stock market. 

The gold stocks (GDX) relative to the stock market are very close to breaking to a new 52-week high. However, the Gold to stock market ratio is quite a bit weaker, though holding a rising 200-day moving average for now.

Gold & Gold Stocks vs. Stock Market

Fed policy is ultimately going to be the biggest driver and as long as the Fed cuts rates multiple times, Gold should be headed towards $1600/oz. If Gold can outperform the S&P 500 considerably or consistently then it has strong potential to return to $1900/oz as a true bull market would be confirmed.

For now, Gold appears to be digesting and correcting recent gains below $1420/oz resistance. A retest of the breakout at $1370/oz would be the time to put more capital to work. To learn which stocks we own and intend to buy that have 3x to 5 x potential, consider learning more about our premium service.