by Adrian Day, International Man:

Gold fans have been frustrated the last nine months. Amid the greatest money-printing spree in history, gold has steadily declined from its peak of $2,063, losing almost $400 at its trough.

What the heck is going on?

First, we should put this in context. Second, let’s look at recent changes that suggest gold is turning. Gold entered last year at $1,517, an auspicious date in religious history, and after the March collapse, fell to $1,471. Gold has risen over $300—that’s over 20%—since the Federal Reserve and other central banks initiated their new QE programs.

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Gold jumped over 40% in less than four months, an extraordinary move for an asset such as gold. In the month before the peak, it went exponential, rising well above the trend. From the late March low, gold has given back about 50% of that sharp run-up, quite a normal pullback after a big move in any market. The fact that gold took nine months for this pullback is a sign of gold’s underlying strength, in my view, not the opposite.

After the short, sharp run-up last spring, gold had to shake out weak holders. First went the short-term speculators, then the generalists, then weak gold investors saying, “Oh no, not again,” until gold was left in mostly strong hands. Even those investors were not buying, thinking there was plenty of time before adding to positions. Amid negative and cautious sentiment, gold was primed for a move up.

What has changed recently?

Fundamentally, what has changed are the two primary factors for gold being so weak this year, dropping over $200 in the first quarter of the year, the weakest start to a year in three decades. Gold fell because both long-term rates and the dollar started to move up. Recently, however, both moves have suddenly and dramatically reversed.

The 10-year Treasury, which fell over five points, bottomed precisely on March 31^st and has rallied this month. The dollar topped out on 1^st April and has started to decline again since then. A lower dollar and lower rates amid negative sentiment have seen gold jump $100 this month.

Then, a little into the month, Bitcoin topped at over $63,000, then fell to under $50,000. The impact of Bitcoin buying on gold has been overstated, I believe. People buying Bitcoin instead of gold, and even more so selling gold to buy Bitcoin, is very much at the margin, I believe. Nonetheless, a sharp decline in Bitcoin could have a similarly positive impact on gold at the margin. I am not sure that we have seen the top yet, however.

These market moves coincide with huge spending plans by the new US administration. Though massive unfunded spending had been telegraphed ahead of the election, most investors did not think it would all really happen, and certainly not quickly. But following President Trump’s $900 billion so-called “COVID-19 relief” in January, Biden followed with $1.9 trillion. Even before those checks were mailed, he proposed $2.3 trillion of so-called “infrastructure” spending. And even before that was approved in Congress, he proposed another $2.3 trillion for government spending in the year ahead, plus “$1 to $2 trillion” to fight racial inequality, and another “$1 to $2 trillion” for further stimulus checks, now slated to last through September. That’s a total of over $8 trillion to over $10 trillion spent, proposed, or planned in just four months.

Suddenly, there was no ignoring that the spending plans were real. Knowing the Fed would play along with the unfunded spending, gold turned upwards.

And inflation has suddenly reared its ugly head, with many consumer goods companies, including, notably, General Mills and Kimberly-Clark, warning that rising input prices mean higher consumer prices ahead.

Technically bullish

One other important factor suggesting gold may have turned: the gold stocks bottomed ahead of gold, with the HUI index bottoming at the end of February. This is usually a positive indicator for a bull move ahead.

Technically, gold looks strong now, as well. As mentioned, we saw a 50% retracement of the prior bull move. It took gold right back to support from last April/May at the $1,685 level. For the last couple of months, gold traded within a range, $1,685 on the low and $1,740–$1,750 on the high. After two failed attempts to break below that floor, gold finally broke out above the ceiling. I am not suggesting that it will be straight up from here. Gold may well need to test the now-floor of $1,750 again.

Gold stocks undervalued

Despite the run-up in gold stocks over the past two months, they remain undervalued on a historical basis: undervalued relative to bullion; low on price (with the HUI less than half its 2011 peak); and low on valuation metrics, trading in the lowest 10th percentile of the historical price-to-cash flow range. Don’t think you have missed the boat!

If history is any guide, you most assuredly have not. Gold cycles, like most commodity cycles, tend to be long. Depending on how you measure each cycle, the shortest up or down over the last 200 years has been 10 years (in the 1970s). In the 1970s, gold stocks (per the Barron’s index) rose 1,322%. In the early 2000s, until the credit crisis, the major stocks (per XAU, which did not exist in the 1970s) quintupled, and after a brief pause, from 2009 to 2011, quadrupled again. That was really one 11-year bull move. If we date the current bull move from 2016, we are only halfway through what equaled the shortest bull move in history. We have a lot further to go.

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