We’ve entered a very rare setup for gold. If you miss this kind of opportunity (or even worse: if you’re on the wrong side of it) you risk losing massive sums of money.
I should know… Back in 2016, I got on the wrong side of a correction in gold prices, shorting GDX and eventually losing 7 figures as gold sharply reversed course and moved higher.
Today, we’re in a similar scenario as gold prices have dragged lower over the past 6 months since hitting all time highs in February.
But I believe we’re getting close to a reversal of the trend.
Why? Because of something very unique that’s happening with regard to gold and US Treasury bonds.
Normally, short term bond prices have a very close correlation with moves in gold prices.
That’s due to the inverse relationship between both bond yields and the price of gold.
When yields are moving up, holding gold becomes (relatively) less attractive compared to holding bonds. This relationship between bond prices and gold is very strong, with a long term correlation close to 0.5, and periods where it’s nearly in lockstep.
But in the last ~10 days, we’ve seen bond prices rise (as yields fell) while gold broke lower.
The gap between these assets is a buy signal for gold.
It means we could see a sharp reversal for gold to the upside soon.
When these kinds of reversals take place, they tend to happen quickly.
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As I wrote in today’s update to my Golden Portfolio 10X members:
“This large move down in rates accompanied by a drop in Gold prices hasn’t been seen since 2008.
The recent drop in rates and decline in Gold price is a rare outlier.
One of the last times we saw this happen was in 2008 when rates declined from 3% to 1% while Gold fell 25% from $1,000/oz to $750/oz.
But once that correlation became stretched, Gold nearly doubled over the next year to catch up to match falling rates. The same thing could be happening now.”
It’s likely that gold could drift lower still in the short term. But you and I? As gold investors, we’re not interested in where gold goes tomorrow – but where it’s likely to be a year or more from now.
The journey to higher priced gold always involves excursions to lower prices in the interim.
The point isn’t to call the bottom, but to position yourself for the most likely outcome over the long term.
One more data point to really hammer home how important it is to be positioned before gold moves: despite some excitement about gold over the past year or so, very few people have allocated money into gold.
By the end of this gold bull, we’ll see gold’s valuation close to the total value of equities. I know that sounds extreme. It is extreme – but that’s exactly what we see at the end of gold bull markets: extremely lopsided valuations.
Today, we’re still on the low side. But if you wait until the extreme valuations are in play, you’ll be playing catch up.
Don’t wait.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio
