The past three weeks have been historic. 

The stock market experienced its fastest 30% drop in history. GDXJ crashed by 50% within two weeks!

We have never experienced anything like this in our sector. The speed of the crash was worse than in 2008. 

This has been akin to a 19th-century style panic.

I was slow to react to the virus and its impact and then added to positions two days too early. It is a black swan and a real game-changer for life, the economy, and capital markets. 

It ultimately will lead to a real bull market in precious metals, but the path from here to there is uncertain and potentially volatile.

Last week I discussed what had to happen for Silver and the junior sector to outperform. 

In this article, I will analyze why the immediate situation may not be bullish for Gold and what has to happen for conditions to turn in favor of Gold.

Gold is driven by falling real interest rates (as well as a steepening yield curve). The driver mainly can be rate cuts or rising inflation expectations. 

During a panic, financial crisis, or recession, cash is king. Households and corporations cut spending, liquidate losses, and raise cash. 

Inflation can fall below zero, and so even with rates at zero, that means real interest rates rise. This scenario is not bullish for Gold until the market senses a bottom and reversal in inflation expectations.

Note (in the chart below) how the real 5-year yield has rebounded sharply as it did during the financial crisis. 

Technically, Gold may have put in an intermediate-term peak at $1700. It has already rebounded from a low of $1450, but we should not rule out a test of $1375-$1400. 

Gold’s net speculative position will improve dramatically in Friday’s report, but some room will remain for additional spec selling. 

Gold Weekly, Gold CoT, Real 5-Year Yield

At present, fundamentals, technicals, and sentiment are not quite where they need to be for Gold to begin a new leg higher.

Technically, we would like to see a retest of $1375-$1400 while open interest and the net speculative position are materially lower. 

In terms of fundamentals, Gold and precious metals will move unabated when they sense stabilization in the economy and the potential for inflation in the months ahead. The path of the coronavirus pandemic, as well as fiscal policy and helicopter drops to households, will play a significant role as far as the timing.

The gold stocks (GDX, GDXJ) were extremely oversold Monday, and perhaps that marked their absolute low. My breadth indicators showed GDX and GDXJ to be at one of the three most oversold points in the last six years.

Ultimately, if policymakers resort to unconventional measures and they can create more than a little inflation, then precious metals have tremendous upside potential over the next few years.