Gold: Bullish Sentiment Continues To Plunge

It’s been a demoralizing 12-month stretch for the precious metals markets, with the gold (GLD) price down more than 7% over the past year and more than 13% from its August 2020 highs. While this performance is not terrible after a 2-year 60% run that preceded this drop, it is quite disappointing at a time when other markets are racing to new all-time highs. The good news is that while this decline has broken the spirits of many investors in the sector, we’ve seen no real technical damage to the big picture, with this being an inside year for gold after two massive up years in a row. Most importantly, gold continues to hold above its multi-year pivot. Given that we’ve seen minimal technical damage and sentiment in the sector has been beaten to a pulp, this recent pullback looks like a buying opportunity, especially for leading miners like Kirkland Lake Gold (KL). Let’s take a closer look below: 

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(Source: Daily Sentiment Index Data, Author’s Chart)

As shown in the chart above, we have seen less than seven instances where bullish sentiment for gold has dipped below 18% on its long-term moving average over the past decade. Most of these signals occurred during a violent secular bear market for gold (2012-2016). However, the most recent signal occurred during a cyclical bear market in late 2018, when gold found itself 15% off its highs after a double-top in 2018. Since 2018, we have seen no dips into this extreme pessimism zone (blue box) for the long-term moving average, but we are hovering just above this level as of this week.

The difference this time around is that gold remains above its monthly moving averages, is just one year out from making a new 10-year high and a new all-time high. Given this backdrop, it’s surprising that we are nearing a buy signal, as previous instances required cyclical bear markets or secular bear markets, with the 2018 signal occurring after a new 400-day low in the gold price. In the current instance, we remain in an uptrend on the long-term charts and have not even broken the Q2 2020 low, which has acted as key support at $1,670/oz. This is a bullish divergence, suggesting that investors are much more bearish than they should be on the metal compared to historical precedents.

We can get a look at this in the below chart, which shows gold back-testing its multi-year pivot, and still posting an inside year after a massive breakout and all-time high yearly close in 2020. Therefore, as long as the $1,750/oz level holds on a yearly closing basis, investors should remain bullish. Given the fact that we’ve seen what looks to be complete capitulation across the sector despite a mere back-test of a 10-year breakout level, I remain very bullish long-term. 

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(Source: TC2000.com)

So, what’s the best course of action?

After two decades of mismanagement, significant share dilution, and untimely/unattractive acquisitions, the Gold Miners Index (GDX) has finally turned things around, with the sector free cash flow positive for five quarters in a row. Notably, past priorities of aggressively replacing ounces with buy-outs have been shifted to paying dividends, investing in current projects and technology, including autonomous haulage, robotic drill rigs, and solar projects to reduce energy costs. Despite this shift, the sector trades at one of its cheapest valuations in over 20 years, even with gold sitting in a long-term bull market. This presents an opportunity in the GDX to gain leverage on the gold price, with one of the best constituents, Kirkland Lake Gold (KL), still trading at just 11x FY2023 annual EPS estimates while it sells gold for average margins of $1,000/oz.  

For those interested in safety through the gold price, the metal has strong support below at $1,750/oz and minimal resistance overhead until roughly $1,950/oz. If the metal were to dip below $1,790/oz, this would offer $50/oz in risk to support at $1,740/oz to $1,750/oz, and more than $150/oz in upside to $1,950/oz resistance. This represents a more than 3.0 to 1.0 reward/risk ratio, making gold an attractive bet below $1,790/oz. So, while I am not a buyer of gold here as I have a large position with a cost basis below $1,575/oz, I continue to add to miner positions on weakness and would consider adding to my gold position if it dipped closer to the $1,750/oz. It’s easy to be bearish on the metals when they’ve massively underperformed other assets. However, it’s at times when everyone hates an asset that investors can accumulate at the best possible prices. This is the juncture we’ve found ourselves at in the gold sector, hence why I continue to add new positions on weakness. 

Disclosure: I am long GLD, KL

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.