It has been a heck of a run for Gold since the Federal Reserve shifted policy.
Before the Fed’s last rate hike in December 2018, Gold was trading around $1200/oz. Since then it has climbed nearly $500/oz or roughly 40%. It broke out to a 6-year high and has made many all-time highs against most global currencies.
Yet, since that period, Silver is barely up more than 20% while GDXJ and GOEX (explorers) have gained only the same amount as Gold.
The catalyst for bull markets in precious metals is essentially Fed rate cuts or rising inflation and inflation expectations. The former tends to benefit Gold, gold producers, and gold royalty companies while the latter will spark outperformance in Silver and the juniors.
Fed rate cuts, economic weakness, and the like have driven the recent strength in the sector, and these factors are most bullish (in relative terms) for Gold, gold producers, and gold royalty companies.
Hence, Silver and the juniors often lag the start of bull markets until inflation or at least rising inflation expectations kick in.
As far as trying to time the future outperformance from Silver and the juniors, here are some essential things to keep an eye on.
First, keep an eye on inflation expectations, which given how markets are trading Sunday night, may bottom out this coming week or soon after.
We plot various inflation indicators in the chart below.
Note that inflation expectations were rising after mid-2016 through most of 2018. However, precious metals (and Silver) did not perform during this period because the Fed was hiking rates, which kept a floor under real interest rates.
Let’s circle back to 2008 and check how markets and ratios performed during that major panic.
The precious metals complex bottomed in late October. Gold against the S&P 500 and Gold against the Euro (not shown) bottomed in September.
Most indicators of inflation expectations bottomed in late December.
Note that Silver relative to Gold did not begin a move higher in earnest until inflation expectations turned.
Moreover, the parent index of GDXJ did not begin a move higher in earnest until early December.
Essentially, Silver and the juniors will begin to lead the precious metals sector when inflation expectations start to turn higher.
Moving on, the Gold to S&P 500 ratio is also significant for Silver and the juniors.
If Gold is not outperforming the stock market, then less capital is going to make its way into the precious metals sector. That may not affect GLD and stocks in the GDX, but it hurts the speculative areas of the sector: Silver and juniors.
Note how the shape of the Gold to S&P ratio chart since 2011 is quite similar to that of Silver. (Shoutout to Patrick for making this observation).
A third thing to watch for, and this could be a lagging indicator, is GDX and GDXJ breaking past their 2016 highs. If and when that happens, speculation should begin to increase, and that will favor Silver and the juniors.
The panic over the coronavirus appears to be a mini-2008 as far as precious metals.
The initial impact is tremendous nominal and real gains in Gold but nothing of the sort in most gold stocks, junior gold stocks, and Silver. Policymakers are responding by pushing interest rates towards zero, which will ultimately cause a significant reflationary recovery.
History doesn’t repeat, but it rhymes.
Back in late October, 2008 Gold made an intraday low at $680/oz. Inflation expectations and the reflation trade did not begin until late December when Gold touched $880/oz.
GDXJ from its early December 2008 low gained 188% over the next six months. The Gold price was up only $160/oz or 19% during that period. And it had not made a new all-time high yet.
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