Is Gold’s Comeback Real, Or Just Another Tease?
Global tensions combine to push the precious metal higher. But the rally may be short-lived.
By Michael Kahn
Gold has been languishing for several years in the absence of inflation. Yet the yellow metal quietly reached a five-month high and vaulted a few technical barriers in the process. While the long-term picture is still rather unconvincing on gold – and silver – the short term is looking much better.
Gold and silver stocks continue to lag the metals themselves, but they too have been on the move higher for the past month. Current geopolitical issues help gold and silver as a hedge against uncertainties in the world, and investors should consider modestly increasing their allocations to the sectors.
Gold bottomed last December, but the current leg higher began March 15 after the Federal Reserve announced it was raising short-term interest rates by one-quarter percentage point to 0.75%-1% (see Chart 1). Gains stalled when the SPDR Gold Sharesexchange-traded fund (ticker: GLD) reached resistance in its chart.
The launch of 59 tomahawk missiles at Syria ahead of the April 7 trading day couldn’t punch gold through to new highs. It proved to be a temporary setback, and two days later the ETF did break out.
The move was confirmed the next day when the U.S. dollar was knocked down by a tweet from the president saying the greenback was “getting too strong.” The dollar and gold often move in opposite directions.
For now, with the ETF above its major moving averages, it appears the top of its four-year trading range in the 131 area is the next target (the ETF traded at $122.72 Monday afternoon). We can’t forecast what will happen if and when the market gets there (see Chart 2).
The VanEck Vectors Gold Miners ETF (GDX) has a bit more work to do before scoring its own short-term breakout (see Chart 3). It still trades just below resistance from its February (and November 2016) highs. It is also still below its flat 200-day moving average. Yet for the first time since its 2016 peak, it is now outperforming the broad market, even if by only a small amount.
Still, a short-term breakout would be a good sign and a reason to increase allocation – at least a little bit – to precious-metals miners.
Consider South African gold miner Gold Fields (GFI), which jumped higher last Thursday as gold moved to within striking distance of the $1,300 level (see Chart 4). This formed an “upside breakaway gap” on its chart – usually a powerful bullish signal, especially when accompanied by strong volume.
Gold Fields has a solid market value of $3.3 billion, but its American depositary receipt trades near $4 per share. Investors should be forewarned that such low-priced stocks carry higher risk as well as higher profit potential.