Here’s Exactly When Gold Bottoms

It’s not advisable to be presumptuous or make absolute statements, but the evidence is convincing. 

Before I answer the question, let me set the stage.

Last week we posted the Gold correction analog chart, which, if we take the average of the three worst bear market corrections, argues for a $1590 bottom in the spring of 2022.

Gold has recovered since the Sunday night flash crash, but the trend is down, and if gold closes below $1700 in the next few months, it will be hugging the red line below. 

Gold Correction Analog

Through Thursday, Gold is down only $11, but HUI (gold producers) and GDXJ (larger juniors) are down 4% on the week. 

The gold miners and juniors have led this move lower, and they currently sit in a precarious position.

If the HUI and GDXJ, shown below, lose current lines of support, then they would be likely to drop another 15%-20%. That break aligns with Gold losing $1675 support.

HUI (top) & GDXJ (bottom)

The potential downside is conjuring up fears of 2013 again.

The market is discounting a lower rate of inflation in 2022 and the likelihood of higher nominal yields. Real rates, which drive Gold, blew out on the downside and will increase into 2022. These are similarities to 2013.

However, the larger macro-market picture is completely different.

The chart below plots the gold stocks against the stock market and the CAPE ratio (10-year price to earnings ratio). 

As you can see, the gold stocks against the stock market ratio trends inversely to the CAPE valuation. Significant peaks in the CAPE ratio usually mark the start of a secular bull market in precious metals. 

The CAPE ratio is 200% higher than in 2009 and 100% higher than in 2011.

Also, note that in 2011, the stock market and economy emerged from the worst recession in decades, and Gold and gold stocks had dramatically outperformed stocks over the previous decade.

Today, valuations for the stock market are in the historical stratosphere while the economy endured a temporary panic after an already record-long expansion. The probabilities argue this economic cycle will be short.  

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