Getting Religion on Gold

Lawyer Clarence Darrow was famously a religious skeptic. Someone asked him: "Suppose you die and go to heaven. And it turns out the conventional story is true?" Darrow replied that he would walk up to the divine judges’ bench, bow low and say: "Gentlemen, I was wrong."

Now it’s time for my true confession. I may have been wrong. On March 16, I laid out my case for gold being in a big bull market in my article, "Your Golden Opportunity."

I was bullish, sure. I said gold made a major bottom in January 2016. And the correction since July was just that — a correction to the new bullish trend.

However, I also said we probably hadn’t seen the bottom of the correction … yet.

Gentlemen, I may have been wrong.

Gold may not wait for March to end.

Here’s what I was thinking: March is usually a terrible month for gold. Look at a monthly chart of the metal. March usually sees gold stumble.

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Those blue dotted lines show the month of March. Down, down, down. Even after the new bull market started in 2016, March was Debbie Downer.

Longer term, this still holds true. Since it became legal to own gold again in 1975, gold has AVERAGED a loss of 1.04% in March. That’s worse than any other month. Yeesh!

So you can see why I was hesitant to call the correction over.

The sell-off in March usually hits its peak fury around options expiration. That’s coming up on March 28.

And we could still see gold sell off. The month ain’t over yet.

But so far, gold is having an EXCELLENT March. Take another look at the chart. This month, highlighted in yellow, you can see that gold tried to sell off. But buyers are coming in. And it’s clear that gold has put in a second, higher low.

So now we should ask ourselves "What is driving gold?" and "what should we be buying?"

There are some big, long-term bull drivers for gold. These include "Peak Gold," the fact that gold mine supply seems to have peaked after years of crushingly low bear-market prices. You can’t turn on mines with the flip of a switch. It takes years. So, tight supply squeezes prices higher.

Balance this against rising demand for gold from a growing middle class in Asia. Countries including China and India have a cultural affinity for gold. The more people rise out of poverty, the more luxuries they can afford.

And in Asia, we’re talking about hundreds of millions of people joining the middle class.

But we can explore the long-term drivers another time. For now, let’s focus on what is giving investors night sweats: political instability. The potential for a global financial crisis. And inflation.

Political instability is obvious. The number of failed states in the world is rising. Venezuela, run into the ground by socialist crooks, will join their number. And it’s a member of OPEC, for Pete’s sake!

Even in Europe, an immigration crisis is threatening to break a united Europe apart at the seams. What do you buy when your currency is in danger of being so much worthless paper? Gold!

Before we get smug about Europe, by the way, remember that OPEC’s petrodollar is a major underpinning of the mighty U.S. greenback. OPEC is in trouble. It ain’t just Venezuela. The oil sheikhs are facing a crisis like they’ve never seen before.

This adds to pressure on the U.S. dollar, which appears to have peaked.

What do you buy to hedge a weakening currency? Gold!

As for a new global financial crisis — of course we’re going to have one. Maybe sooner than later. And you know this, because bad actors like Wall Street banks aren’t punished for their misbehavior. They’re rewarded!

Heck, Goldman Sachs cronies are running Washington, D.C., now. They’re rolling back any rules that kept their egos in check. The odds of some big, bad bet unwinding are growing. Meanwhile, in China, a debt crisis is ballooning to Hindenburg proportions.

That doesn’t mean a crisis must happen this year. Or even next year. But investors will hedge against the potentiality. An easy way to do that? Gold!

Now let’s talk about the bugbear in the room. Inflation. For a long time, it seemed like inflation was dead. Wall Street structured large bets on that idea.

So what’s happening with inflation now? Take a look and weep …

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The yellow line is core inflation. The blue line is headline inflation. It is soaring. In fact, the headline Consumer Price Index (CPI) is near a five-year high.

Sure, we all know the Fed has its own inflation gauge. It’s called the PCE Index. In January, the PCE rose 1.9% year-over-year. That’s the closest that PCE inflation has been to the Fed’s target of 2% since 2012.

So that’s why the Fed hiked rates. Too bad Yellen & Co. are behind the ball, and probably will be for years to come. The REAL interest rate — the Fed’s interest rate minus inflation — is negative. Not only in the U.S., but also in Japan, Switzerland and the Eurozone.

When real interest rates are negative, keeping money in the bank is a fool’s gambit. Gold, meanwhile, is known as an inflation hedge.

So if you think investors might buy more gold, I agree. We’ll see another charge into the SPDR Gold Trust (GLD) and other physical gold ETFs.

The thing is, the stampede hasn’t happened yet. Wall Street’s "Come to Jesus" moment on gold is in the future. When it happens, you’ll want to be positioned in the best mining stocks.

Beyond that, keep your eye on the longer term: There’s a "perfect storm" coming for gold. And it could fuel extraordinary gains. I’ll be debuting a new publication soon to help you make the most of opportunities in the metals and mining space.

One more thing: As I said, March is usually a bad month for gold. But July, August, September and October are traditionally good months for gold.

Since gold tends to be weaker in the second quarter, that’s when you want to accumulate metals and miners. BEFORE gold blasts off in the third quarter. Because if this is the kind of March we’re having, what could happen when seasonal forces actually FAVOR gold?

For now, let me leave you with this factoid about the VanEck Vectors Gold Miners ETF (GDX). It’s a basket of leading gold miners.

On Tuesday, the GDX ROSE 1.6% while the S&P 500 FELL 1.2%. Recent history shows that when the GDX and S&P 500 have mirrored moves of at least 1%, the GDX is higher 20 days later.

So, the odds favor that outcome. Consider it a low-risk way to play this bull.

Wall Street doesn’t believe this rally yet. Do you? The opportunity is waiting for you. You just need the guts to reach out your hand and take it.

All the best,
Sean Brodrick

Your thoughts on “Getting Religion on Gold”

  1. Thanks, DJ. Sean asked me to pass some thoughts along to you …

    If you mean about China pulling some shenanigans in the gold market, I think we need to worry about our own big banks first. We know that the Wall Street banks have suppressed and manipulated the prices of gold and silver. Just last year, there was confirmation that the London gold fix and the London silver fix were both manipulated for a decade by the banks setting it.

    Big banks settled lawsuits and apologized, and the matter was closed. So they’ve given up manipulating gold and silver, right? Ha, ha, ha! Sure.

    But don’t let the fact that these markets are manipulated scare you off from investing. The big banks may stand in the way sometimes. But eventually, huge economic forces are too big even for them. And then moves that were long suppressed are made very quickly.

    And remember, my intermediate-term target on gold is $1,540, then $2,700.

  2. DEAR MR BRODRICK,

    You almost certainly will have seen Brad Hoppmann’s recent piece on a gold scandal unwinding in a big way.

    Do you have any thoughts?

    D J GRAY

Comments are closed.

Sean travels far and wide to seek out small-cap values in the natural resource sector. His journey started in New England. As a youth he worked on Mt. Washington, on the cog railroad that runs to the summit. Working on…