A Test Case for Gold Demand
Selling panics are never fun, but they can be quite useful for gauging gold demand, for extreme financial market volatility often reveals just how much safe-haven interest truly exists for the metal. And we’re about to find out just what participants think about gold after shunning it for most of this year.
The selling event in the U.S. equity market that began last month on fears surrounding the latest Covid variant hasn’t ended yet, with the Nasdaq Composite Index shedding 6% over the past two weeks as the formerly top-performing mega-cap growth names have come under serious liquidation.
Adding fuel to the selling pressure are worries that the long period of “easy money” may be ending. Investors are evidently throwing another “taper tantrum” in response to the Fed signaling that it could increase the pace of tapering asset purchases and raise rates faster than previously anticipated. As Barron’s Randall Forsyth noted:
“[Fed Chair] Powell indicated to the Senate panel that the Federal Open Market Committee could consider winding up its asset purchases ‘perhaps a few months sooner’ than currently expected. As announced earlier this month, the Fed made its initial cut of $15 billion, lowering its monthly purchases to $105 billion from $120 billion previously.”
Ordinarily, less liquidity and higher interest rates would be bearish for the gold price outlook, but these aren’t normal times. Indeed, capital is looking for a safe place to hide for as long as the market outlook remains uncertain. And right now, gold is in the pole position among traditional safe haven assets for attracting flight capital.
Not only has gold lately been outperforming the broad U.S. equity market on a relative basis of late, it has also been conspicuously outperforming the 10-year Treasury Yield Index (TNX) for the first time since July. As discussed previously, I regard gold’s relative performance versus TNX as one of the key indications of gold demand. And as you can see here, the gold versus TNX ratio has recently established a series of higher peaks for the first time in months.
Another sign that gold has entered an across-the-board position of relative strength against other major assets is the following chart. This shows gold’s relative performance versus the Reuters/Jefferies CRB Index (a broad commodity market index). Historically, whenever gold outpaces the broad commodities market for an extended period (preferably for at least three months), it suggests that gold safety-related demand is dramatically increasing.
The reasoning behind this is that when commodity prices, led by crude oil, are falling while gold’s price is rising, investors are presumably buying gold to hedge against financial market or economic turmoil. In other words, it means the gold price is being driven purely by safety demand as opposed to commodity price inflation. And this is the ideal environment for owning gold since it has always performed best whenever the metal’s “fear factor” is in the driver’s seat.
An additional consideration (though not as important as the factors mentioned above) is that gold is holding up well when compared to the cryptocurrency market. Bitcoin and Ethereum prices tumbled last week, which many crypto analysts attributed to a spillover effect from equity market weakness and Omicron variant worries. Whatever the rationale, bitcoin’s underperformance vis-à-vis gold confirms that crypto isn’t a preferred safe haven asset, contrary to the assertions of bitcoin enthusiasts.
While gold has held up well compared to other risk assets in the last several days, it still hasn’t recovered above its key trend lines to confirm a new buy signal (per the rules of our trading discipline). As of this writing, our favorite gold-tracking ETF is under its 25-day and 50-day moving averages, so we’ll need to see some additional improvement before getting the all-clear signal to jump back into a short-term trading position. But so far, I’m liking the way gold is shaping up in the face of broad market selling pressures, and I anticipate we’ll soon have another entry point.
Updates
We were stopped out of our lone tin mining stock, Alphamin Resources (AFMJF), which explores and develops mineral properties in the Democratic Republic of the Congo. Participants purchased conservative position in AFMJF on October 7 using a level slightly under 58 cents as the initial stop-loss. I also previously suggested taking half profits in early November after the stock’s 21% rally and raising the stop to slightly under 72 cents. We were stopped out of the rest of our position in AFMJF last week when this level was triggered. SOLD
Although I had high hopes for A-Mark Precious Metals (AMRK) as a counter-trend play for a volatile precious metals market, AMRK unfortunately triggered our stop-loss slightly under 65 during last week’s sell-off. SOLD
Last week we were stopped out of our lone uranium stock, Denison Mines (DNN), a Canada-based uranium exploration, development and production company. Investors purchased a conservative position in DNN in October with a level around 1.40 as the initial stop-loss. After a recent 15% rally, I advised taking some profits and raising the stop on the remaining position to slightly under 1.50 on a closing basis. We were tripped out of the remaining position last week when DNN violated this level. SOLD
Livent Corp. (LTHM) is the largest U.S. lithium-only miner, providing a range of lithium-based products and serving the EV, chemical, aerospace and pharmaceutical industries. Participants on October 13 bought a conservative position in LTHM using a level slightly under 22.25 as the initial stop-loss. After rallying 21%, I then recommended taking some profit in LTHM and raising the stop-loss on the remaining position to slightly under 28 on a closing basis. This stop was triggered on December 3, which takes us out of the remainder of our trading position in the stock. SOLD
Last week I suggested selling half our stake in Lynas Corp. (LYSCF), a rare earth mining company based in Australia and boasting one of the highest-grade rare earth mines in the world (including neodymium and praseodymium (NdPr), lanthanum, cerium and other mixed heavy rare earths). Participants recently bought a conservative position in LYSCF using a level slightly under 5.25 (near the 50-day line) as the initial stop-loss on a closing basis. But after rallying 15% from our initial entry point, it was time to take some profit based on the rules of our technical trading discipline. I also suggest raising the stop-loss on the remaining position in this stock to slightly under 5.85 (near the 25-day line). SELL A HALF
Traders recently purchased a conservative position in the United States Copper Index Fund (CPER) using a level slightly under 25.60 (the nearest pivotal low) as the initial stop-loss on an intraday basis. Let’s maintain this stop for now. BUY A HALF
New Positions
After underperforming the sector for much of 2021, Harmony Gold Mining (HMY) is now in a position of relative strength compared with gold, the benchmark PHLX Gold/Silver Index (XAU) and the broad market S&P 500 Index. Harmony is a world-class gold producer operating in Papua New Guinea, one of the world’s premier new copper-gold regions, and is also South Africa’s largest gold miner. In its fiscal Q1 2022 report, the company reported gold production of 413,714 ounces, representing a 32% increase from a year ago thanks to higher gold grades and metric tons milled. Moreover, management guided for 2022 gold production to be in line with, or above, last year’s production of 1.54 million ounces, with a midpoint forecast of 1.58 million ounces. Harmony is also focused on de-leveraging its balance sheet going forward, and the market has been rewarding the firms recent de-risking measures. Traders can purchase a conservative position in HMY using a level slightly under 3.75 (the 50-day line) as the initial stop-loss on a closing basis. BUY A HALF
MP Materials (MP) operates the largest rare earth mineral mines in the Western Hemisphere, currently accounting for around 15% of total global supply, with a focus on Neodymium-Praseodymium (NdPr)—a crucial input used for making rare earth magnets used in many of those devices. MP opened Wall Street’s eyes to the oft-overlooked industry in Q3, boasting estimate-beating revenue that soared 143% from a year ago and 36% sequentially, while net earnings nearly tripled, prompting at least two major institutions to recommend the company. Management also reported generating a “significant” amount of cash from operations, which will be used to advance its Stage II and Stage III plans to restore the full rare earth supply chain to the U.S. (Most of the rare earth concentrates MP produces are sold to China through an intermediary, but its plans will allow it to bypass the middleman and fully process and sell NdPr straight to end users.) Traders can purchase a conservative position in MP using a level slightly under 37.15 (50-day line) as the initial stop-loss on a closing basis. BUY A HALF
Portfolio
| Stock | Price Bought | Date Bought | Price 12/7/21 | Profit | Rating |
| Alphamin Resources (AFMJF) | - | - | - | - | Sold |
| A-Mark Precious Metals (AMRK) | - | - | - | - | Sold |
| Dennison Mines (DNN) | - | - | - | - | Sold |
| Harmony Gold Mining (HMY) | New Buy | Buy a Half | |||
| Haynes International (HAYN) | - | - | - | - | Sold |
| Livent Corp. (LTHM) | - | - | - | - | Sold |
| Lynas Corp. (LYSCF) | 5.85 | 11/16/21 | 6.43 | 10% | Sell a Half |
| Ryerson Holding (RYI) | - | - | - | - | Sold |
| MP Materials (MP) | New Buy | Buy a Half | |||
| United States Copper Fund (CPER) | 27 | 11/23/21 | 27 | -1% | Buy a Half |
Buy means purchase a position at or around current prices.
Buy a Quarter/Half means allocate less of your portfolio to a position than you normally would (due to risk factors).
Hold means maintain existing position; don’t add to it by buying more, but don’t sell.
Sell means to liquidate the entire (or remaining) position.
Sell a Quarter/Half means take partial profits, either 25% or 50%.