It’s been a rough start week thus far for the gold (GLD) price, with the metal giving up nearly all of its monthly gains and retreating back into negative territory. However, while some might feel like throwing in the towel, it’s important to note that gold is still sitting above the pivotal $1,750/oz – $1,765/oz level (quarterly resistance area from 2011/2012) and has one of the best-looking charts of any asset class. Combined with sentiment readings that are similar to those we typically find in the depths of bear markets, I remain bullish on gold on both a medium-term and long-term basis.
As shown in the chart above, gold has pulled back sharply over the past two weeks, sliding from $1,870/oz to $1,790/oz, putting a dent in the metal’s short-term momentum. However, while some of the bulls have unnerved, we have seen minimal technical damage from this correction. In fact, the metal is pulling back towards a major support level between $1,745/oz to $1,765/oz, which represents the back-test area of its multi-year downtrend line and its quarterly resistance area from 2011/2012. So, while this correction could continue, I would view further weakness as a buying opportunity.
If we move over to the quarterly chart of gold to get a better look at the bigger picture, we can see that gold continues to see a major change of character from the previous decade. This is because the $1,765/oz level, which was a brick wall of resistance at the end of its last secular bull market seems to be the new support area. If this is the case, this would be a very positive development. The reason is that new bull markets are confirmed by prior resistance turning into new support, and to date, the bulls playing are defense exactly where they need to at this previous resistance zone.
Finally, let’s look at the bigger picture (30-year chart). We can see that gold has typically performed the best when it has been trending above its rising monthly moving average (blue line). The gains have been quite favorable after breakouts from multi-year consolidation periods. The last time this occurred was in 2008, but gold briefly re-tested its breakout area before a violent uptrend over the next three years. Last year, we also saw a major breakout, but many of the bulls have left the trade in search of greener pastures during what’s been a frustrating back-test.
However, if history rhymes with the previous breakout, this consolidation is likely nearing its end, and the metal is getting ready to make new highs in the next 12 months, which would target a move above $2,100/oz for the metal. This would dramatically affect the margins of names in the Gold Miners Index (GDX), with most miners producing gold for $1,050/oz, and a $300/oz move in the gold price would add an extra $300/oz to their bottom lines.
Despite this favorable technical pattern (back-test of a major breakout) and the fact that gold remains in an uptrend, sentiment is the sourest it’s been in years, and valuations for miners are near similar levels to when gold was trading below $1,500/oz. This presents an opportunity for patient investors, with names like Agnico Eagle (AEM) having up to 50% upside to fair value if investors can look past the negative headlines and be contrarians. Given the outlook, I remain bullish on miners and gold medium-term and long-term, and I would view further weakness as a buying opportunity.
So, what’s the best course of action?
For investors that prefer to play the metal, I would expect any pullbacks below $1,765/oz to present a low-risk buying opportunity, with a clearly defined risk below $1,670/oz. This means that as long as gold holds $1,670/oz, there’s no reason to abandon long positions. Among the miners, Alamos Gold (AGI) and Agnico Eagle are two high-quality names currently sitting on the sale rack, trading at deep discounts to their historical valuations with meaningful production growth over the next several years. For now, I remain long gold, AGI, and AEM, and I would consider adding to my position in AEM if the stock fell below $50.00 per share.
Disclosure: I am long AGI, AEM, GLD
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.