How Things Change – For The Bullish

A few months ago, there is no doubt that the three pieces of macro news that hit over the last week – the Fed starting to taper its bond market support, strong jobs data for October, and a very high inflation reading – would have hurt gold. Collectively they probably would have hurt gold a lot, all because they would have made the market worry about rate hikes.

How things change. Here’s how gold reacted to today’s inflation data.

And that gain came after the yellow metal gained US$65 per oz. or 3.6% in the five trading days prior. All told, gold is up US$96 per oz. or 5.4% in a week.

Clearly, perspectives have changed. And for good reason. Before, investors always worried that inflation and signs of economic strength would pull rate hikes forward. In the last few weeks central bankers in the US and the UK have made clear they do not plan to raise rates any time soon.

That message allows gold to react as an inflation hedge, pure and simple. It means traders aren’t focused on getting ahead of a rate hike announcement and can just trade things for what they are: a strengthening market with strong inflation and interest rates at zero. That is the perfect recipe for negative real rates, which mean dollar-based holdings will lose value. The search for a safe alternative to that is precisely why gold is the most longstanding inflation hedge around.

Are we in a brave new world? I think we might be. Charts support the idea. No matter how you draw the line, SPDR Gold Shares (the largest physically-backed gold ETF globally) has broken up from the downtrend it has held since August 2020.

Miners are following gold up and could soon break through their trendline too (VanEck Gold Miners ETF GDX shown below).

The pieces are in place. Perceptions have shifted. Seasonality will soon be on our side. It’s all pushed me from positive to decidedly bullish.

If gold is starting a new leg up from here that will last into the spring (based on seasonality and physical buying trends in China and India), what’s an investor to do?

Buy the easy wins.

There are all kinds of stocks out there that deserve to be trading higher based just on the price of gold. They’ve been left behind because there just weren’t enough investors interested in gold. If that is indeed changing, there is all kinds of low-risk upside out there.

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