Gold ended last week 1.9% higher, and gold miners soared as well. Is this a rally you can buy?
The yellow metal has been beaten down so long that all I can manage is “maybe.”
But today, I’ll give you three reasons why gold could go higher.
In fact, the rally may have already started on Friday. We saw a 2.8% rally in gold that day, and a whopping 10.1% rally in the VanEck Vectors Gold Miners ETF (GDX), which tracks a basket of leading precious metals miners.
Let’s look at why …
Reason No. 1: U.S. Dollar Rally Looks Exhausted
Last Wednesday, Fed Chair Jerome Powell tripped the market down the stairs, saying that it is “very premature to think about pausing interest rates.”
Powell’s words sent the U.S. dollar higher, and since gold is priced in dollars, that flattened a budding gold rally as well. Thursday saw prices go even lower — down to the lowest levels in 2.5 years. Gold dipped as low as $1,618 and closed at $1,630.95.
But that all changed last Friday when two regional bank presidents — Richmond’s Thomas Barkin and Boston’s Susan Collins — both sounded off, saying they will “look closely” at whether future rate cuts need to be as aggressive as others have been this year.
The market loved this news, thinking it shows the Fed is ready to pivot and end interest rate hikes sooner than later, despite what Powell said on Wednesday.
That hammered the U.S. dollar 1.8% lower — a huge move for a currency. And since gold sits on the opposite end of the Seesaw of Pain from the greenback, the metal shot higher.
This is the weakest of my three arguments, because I don’t think any of the Fed governors are going to cross Powell on interest rates. On the other hand, the modern stock market is all about perception. And the market’s perception that the Fed could soon scale back rate hikes is enough to light a fire under gold.
Reason No. 2: Investors Turn Optimistic on China
Rumors are circulating that China’s leaders are considering easing that country’s strict COVID-19 policies. This sent all kinds of stocks jumping, especially China stocks.
But stocks leveraged to copper, nickel, iron, steel, lithium — and yes, gold and silver — also got a boost.
Are these rumors true?
On Friday morning, Zeng Guang, the former chief scientist at the Chinese Center for Disease Control and Prevention, said the country’s strict zero-COVID policy will change big-time.
Guang said most COVID-19 testing would stop and the border between Hong Kong and mainland China will open in the first half of next year. China’s borders with the rest of the world will likely follow. Zeng should probably know, so yeah, these rumors are likely true.
Is this bullish for gold? Yes!
China wrestles with India for the title of world’s top gold consumer. Last year, China’s gold consumption rose 51% year over year.
China has a cultural affinity for gold. If that country is loosening up its COVID-19 restrictions, we could see a repeat of what we saw in the U.S. when our restrictions lifted. Consumers could go buy-buy-buy!
The opening of China’s economy could provide a long-term boost for all sorts of natural resources, including precious metals.
Reason No. 3: All the Optimism Is Beaten Out of Gold’s Chart
Look at this five-year chart of gold:
Gold is testing lows last seen 2.5 years ago. You can also see the metal is range bound. The easiest move for gold now is to the top of its range. And THAT could be a head turner for gold investors who have had the optimism beaten out of them.
So, yes, there are three good reasons why gold could go higher from here. Gold has disappointed us so much this year that I don’t like to use the word “bull.”
But you may want to keep a hat with horns on it ready. Gold’s turn to shine is coming.
I mentioned the GDX earlier, and that’s a fine way to play it. But individual miners can give you so much more.
The top two holdings of the GDX include the world’s largest and second-largest gold-mining companies. Those two miners account for nearly 27% of the exchange-traded funds holdings.
As always, conduct your own due diligence.
Best wishes,
Sean
