Gold Bottom

Enthusiastic gold investors everywhere are wondering…has gold finally bottomed?

The short answer is… I think so.

That’s because, from a number of perspectives, that seems the most likely scenario. Right now most of the evidence points in that direction.

A dramatic rip higher from March to August last year caused gold to soar by 40% in just 5 months. It also allowed gold to establish a new nominal all-time record high at $2,070.

Since then gold’s been retracing, giving up about half of those gains. Two major drivers led to this: sentiment and the dollar. At this point, however, it seems both factors may have run their course, setting up gold and gold stocks for a new rally.

Let’s examine the current outlook to formulate what’s most likely ahead.

Negative Gold Sentiment Exhausted

Markets ebb and flow, and gold is certainly no exception. The dramatic rise last spring and summer was likely driven by fear as the impact of the COVID-19 pandemic was being assessed.

One of gold’s biggest attractions is obviously as a safe haven, a role it’s played for thousands of years. And last year was an excellent example. But as the world grew accustomed to its new reality, that meant other drivers took center stage.

It was also natural for gold to start ebbing. Naturally, large numbers of investors became enamored with gold and gold stocks as they chased them higher.  That meant lots of buying near the early August peak. But that buying soon became exhausted. 

Savvier investors then started to take profits while the late buyers eventually capitulated after buying high. Their lack of understanding, and lack of conviction, made them victims. It looks like that final capitulation happened in late March, as the sentiment pendulum swung to an extreme.

But fundamental drivers worked in conjunction with sentiment to help mark a turning point.

I have detailed before the effect of rising long-term bond yields. Consider that the US 10-year Treasury yield bottomed at 0.51%, just two days before gold peaked.  Since then the 10-year yield has soared, peaking on March 31 at 1.75%. That’s a 240% spike in yields. Massive global fiscal and monetary stimulus on a record scale caused investors to start pricing in much higher expected inflation.

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