Remembering the golden rule

02/21/20
  • Gold has outpaced the S&P 500 so far this year
  • Prices pushed to seven-year high yesterday
  • Analysts cite different risk factors driving the move

Strange times?

Even though the US stock market is just a day removed from its latest record high, April gold futures (GCJ0) have outpaced the S&P 500 (SPX) so far this year:

Chart 1: April gold futures (GCJ0) and S&P 500 (SPX), 12/31/19–2/20/20. Gold up on stocks YTD.

Source: Power E*TRADE


Truth be told, gold has been holding its own vs. equities since mid-November, and while it’s not against the laws of nature for the two markets to move in the same direction, gold has historically shined brightest when the stock crowd is panicky (or at least nervous) and flips the “risk-off” switch.

It’s no coincidence, for example, that gold spiked dramatically higher in early January after the US killed an Iranian general in a drone attack and Iran retaliated with a missile strike on US forces based in Iraq. As tensions eased, so did gold prices—until the coronavirus stepped in to fill the risk void. Yesterday gold hit its highest level since February 2013, with the April futures having rallied more than 4% in 12 days to a new contract high of $1,626.50:

Chart 2: April gold futures (GCJ0), 11/11/19–2/20/20. April gold futures (GCJ0) price chart. Seven-year high for gold.

Source: Power E*TRADE


The rally has—as conspicuous moves in gold often do—put this market back in the spotlight. Citi analysts, for example, recently gave gold a $2,000 price target for the next 12–24 months, citing coronavirus fears as well as the risks associated with a very long-running bull market (their forecast for the next 6-12 months is a more modest $1,700).1

Traders pondering gold’s future may be weighing two factors right now. First, if coronavirus worries have played a significant role in the recent rally, it stands to reason the market could lose some of its bullish fuel as fears recede. However, although the virus still appears to be fairly contained, there’s still a great deal of uncertainty about its longer-term economic impact and how that will play out in the stock market. No one knows when “fear” will truly be in the rear-view mirror.

Second, since gold has shown it can rally even if stocks are trending higher (e.g., 2004–2008 and 2009–2011), there’s always the possibility that gold could feed on its own bullish momentum even if the coronavirus fades into the background, as trend-following trading systems could continue to trigger as the market breaks out to higher highs.

In fact, after pushing to a 30-day (or longer) high close (which happened on Tuesday), gold has shown a tendency to trade higher over at least the next month:

●10 trading days later it was higher 62% of the time

●20 trading days 59% of the time (with an average gain of 1.1%)2

That said, long-time gold traders will tell you that (as the chart above illustrates) gold has a tendency to surge (on risk news) and retreat (on no news/good news), which suggests savvy traders may be inclined to look for potential buy points on days the equity market is not digesting scary headlines.

 

Chart 3: Barrick Gold (GOLD), Newmont Goldcorp (NEM), and Royal Gold (RGLD), 10/30/19–2/20/19. Gold stocks price chart. Gold stock divergences.

Source: Power E*TRADE


Finally, take a look at the above chart of three gold stocks—Barrick Gold (GOLD), Newmont Goldcorp (NEM), and Royal Gold (RGLD).

While GOLD and NEM have both tracked gold’s recent surge, RGLD hasn’t—a reminder that “commodity stocks” aren’t the same as commodities, and their individual trajectories can vary quite a bit.

Today’s numbers (all times ET): Existing Home Sales (10 a.m.), Baker-Hughes oil rig count (1 p.m.).

Today’s earnings include: Berkshire Hathaway (BRKB), Deere (DE).

 

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1 CNBC.com. Citi sees gold topping $2,000 in next 12 to 24 months. 2/19/20.

2 Based on spot gold daily closing prices, 12/31/99 – 2/19/20. Supporting document available upon request.

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