Editor’s note: With gold falling to a three-week low today and miners taking it on the chin, many of our subscribers are wondering what to do next. We asked our resident small-cap mining expert Sean Brodrick what he makes of it. In short, buckle up before you buckle down. Because the ride should be worth it. Take it away, Sean …
Gold is on a rollercoaster ride, and the next dip could be a doozy.
Such a move would bring us to an incredible buying opportunity. But a lot of investors could end up with their hearts in their throats from this wild ride. They might get too scared to buy.
That’s an opportunity for those among you with steel in your spines.
Personally, I’m licking my chops at the idea of all the great stocks I could buy on the cheap. And I’m launching Red-Hot Resource Millionaire this week. I would LOVE to point subscribers to a bucket-load of bargains.
So here’s what happened …
I’ve told you how gold banged its head on a big downtrend. This downtrend has been in place since 2011. It’s no surprise that gold can’t punch through it the first time.
Next comes a sell-off. And sure enough, the SPDR Gold Shares (GLD) — the world’s largest commodity ETF — saw the biggest outflow among commodity funds in the week ending April 28.
The real carnage was in miners. The VanEck Vectors Gold Miners (GDX) — the biggest ETF that invests in gold-mining companies — saw its largest outflow on record. You can see that on this chart from Bloomberg.
In all, $778 million flowed out of the GDX in just one week.
We expect miners to over-emphasize the move in gold. That’s because miners are leveraged to the metal. But after selling off on Monday, gold traded fairly flat last week. So, we might be seeing selling in miners in anticipation of a deeper sell-off in gold.
Could we see such a sell-off?
One of the best indicators of gold prices is real interest rates, or interest rates minus inflation. There are multiple interest rates to choose from. But here’s a chart of the Fed 10-year Treasury yield minus inflation. The black line with a tan fill. I’ve charted gold against it as a blue line.
You’ll see that the real 10-year yield was recently 1.93%. That’s different from Friday’s headline 10-year yield of 2.28% because I deducted inflation.
You can also see that real 10-year yields peaked in January. They’ve slid lower ever since. They bounced last month. At the same time, gold has been in an uptrend since the end of December. It recently peaked at the same time that the real 10-year yield bottomed.
That’s not a coincidence.
So what’s next? I think the real 10-year yield could rally up to that downtrend. That in turn, should push gold lower. Though there are no guarantees.
Why does that happen? Because the real yield reflects what you get on a Treasury minus inflation. If inflation is eating up your Treasury yields, you look for other investments. Perhaps one that is historically a hedge against inflation.
And so that’s why I watch the real interest rates as one of my indicators of where gold might go next.
This is all short-term stuff. Longer term, gold looks so bullish that I almost laugh at the bears. They’re standing in the path of history’s steamroller. One fundamental force after another is lining up to push gold higher.
So, am I anticipating a deeper pullback in gold and mining shares? Yes. If it happens, will I jump on that opportunity? You bet your sweet assets I will.
You might need a golden seatbelt to get through the next part of the precious metals rollercoaster. The dips could be heart-stopping. The turns could leave you dazzled.
But the time to buy is coming. These kinds of opportunities come very rarely. Be ready to act. History is on our side.
All the best,
Thanks, Sean. I always appreciate your insights. And I know our readers do too. Speaking of which, if you have a comment or question about today’s Afternoon Edition topic, or any of the topics we cover, just leave a comment below.
Stocks mostly rose during Monday’s session after the government narrowly avoided a shutdown last night, after a bipartisan group pulled together a $1 trillion spending bill to fund the government through September. The deal, if passed by Congress, does not include money for a U.S.-Mexico border wall but does add billions in defense spending and border security. The broader S&P 500 gained 0.2%.
• The Nasdaq hit a record closing high after the president’s latest executive order. This one creates the American Technology Council, whose mission is to "transform and modernize" the U.S. government. The president will reportedly invite several tech executives to the White House in June to discuss "how it uses and delivers information." Techs led the markets higher, with the Technology SPDR (XLK) gaining 0.75%.
• Twitter (TWTR) landed a big streaming-content partner in Bloomberg. This deal will result in a yet-unnamed content channel for Twitter that features live reports from Bloomberg’s international news bureaus and other video content. TWTR soared 6.4% on the news.
• Apple (AAPL) hit a record high in front of tomorrow’s earnings and expected dividend hike. Shares surged 2% to $146.58 as analysts contemplated the company’s massive quarter-trillion-dollar cash hoard and what it might do with that money.
• Gold, oil down 1%: It was a down day for gold and black gold. The yellow metal hit a three-week low at $1,255 after the Atlanta Fed’s GDPNow model forecast 4.3% growth in the second quarter. And WTI crude continued its slide after a negative April. It closed at $48.84 on continued fears about rising output and new fears about falling demand.
Good luck and happy investing,
Uncommon Wisdom Daily