Investors in the precious metals sector have endured a long stretch of underperformance, with the gold (GLD) price sliding nearly 20% from its Q3 2020 highs while most other asset classes have risen. Those investors holding producers have had an even tougher time, with the Gold Miners Index (GDX) down 15% year-to-date. However, with many generalist investors throwing in the towel and even gold bugs beginning to rethink their loyalty to the trade, the end of the correction is likely near. This sense of despair is corroborated by bullish sentiment readings, which have dropped to their lowest readings since 2018. Let’s take a closer look below:
(Source: TC2000.com)
As evidenced by the above chart, gold is an emotional trade, with sentiment swinging from one extreme to another more than 14 times over the past decade. However, while we’ve seen multiple readings of extreme pessimism since 2012, all of these readings except one (Q3 2018) occurred in the 2012-2016 secular bear market. These readings denote instances when we have more than four market participants bearish for every one investor that’s bullish, with readings this extreme making sense in multi-year bear markets.
Due to the violent correction in the gold price in 2018, we saw the first reading in a decade of extreme pessimism in September 2018 outside of a secular bear market. This ended up marking the bottom for gold at $1,180/oz. Within the next two years, gold advanced more than 60% to a new all-time high above $2,000/oz and has yet to trade below its August 2018 low, which occurred just two weeks before the sentiment buy signal. As the current reading shows, we could be less than two weeks away from a similar reading, with the 14-month correction for gold breaking the spirits of most investors. This would represent a strong contrarian buy signal, and it would have very bullish implications for the metal going forward. If it were to play out similarly to the 2018 signal, it would forecast a range of $1,650/oz to $2,600/oz over the next two years, which would likely translate to a more than 100% increase in the Gold Miners Index. This is because the index typically mirrors the performance of the gold price, but with more than twice the leverage, given the significant changes in margins that producers enjoy when the gold price is rising.
So, what’s the best course of action?
(Source: TC2000.com)
As shown above, gold continues to back test its multi-year breakout level in the $1,740/oz to $1,760/oz range, and as long as gold stays above $1,650/oz, I see no reason to lose sight of the bullish long-term picture. This suggests that any dips below $1,720/oz before year-end should provide low-risk buying opportunities, contingent on the metal holding $1,650/oz. However, with many gold producers trading at nearly 10% free cash flow yields and paying annualized dividends above 3.0%, I see much better torque in the miners, given that they seem to be pricing in a $1,550/oz gold price. For this reason, I am maintaining my position in gold, but am more interested in the miners, with two of my favorite ideas being Alamos Gold (AGI) and Agnico Eagle Mines (AEM).
Disclosure: I am long AEM, AGI, 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.
GLD shares were trading at $164.38 per share on Tuesday afternoon, up $0.46 (+0.28%). Year-to-date, GLD has declined -7.84%, versus a 17.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.
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