iGold

Gold is retesting its 2016 – 2017 consolidation breakout, and the decline seen over the previous two weeks provides an ideal opportunity for precious metals investors to make final purchases before the technical model suggests that 2016 highs will be exceeded for good.

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While ownership of physical gold should be the cornerstone of a precious metals portfolio, we are overweight the miners at this juncture. Despite gains of 100% – 500% in 2016, the gold mining sector is still historically undervalued relative to gold.

Throughout history, ratios between real asset classes revert to the mean when they become radically undervalued, and this time will prove no different. For those contrarian-minded investors who have a higher tolerance for reward and risk than the above targets for gold bullion alone would provide, the opportunities in the gold producing equities are quite significant.

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Gold has finally broken out of a simple yet powerful technical boundary – the declining linear trendline which defined the 2011 – 2017 period in precious metals prices. The ramifications for this breakout are significant and we expect higher gold prices are in store for the next year at minimum.

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Since gold’s all-time high of $1,923 per ounce in September 2011, the nearly 6-year decline that this week has brought prices back to $1,270 has been broadly defined by a falling linear trend of selling pressure. This declining trend is being tested immediately, and a breakout higher would be a major signal that gold’s period of falling prices has come to an end. However, caution is warranted as leading indicators are still flashing warning signals for precious metals prices.

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Unfortunately for gold, we are living through one of those anomalous time periods in which the US dollar and precious metals are positively correlated – but to the downside.

Throughout history, gold tends to have its strongest moves when the US dollar is losing value, as gold receives bids from those looking to protect their savings against a decline in the world’s reserve currency.

However, as we can see at right, especially since the Federal Reserve meeting in mid-June, both the US dollar and gold have moved in the same direction: lower.

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On the heels of the Federal Reserve’s most recent ¼ point interest rate hike on Wednesday, gold and the precious metals complex have seen a negative bearish reversal that deserves caution over the short and intermediate term.

Fundamentally, the interest rate hike and accompanying policy statement, which indicated that the Fed would begin to taper down its balance sheet over the coming year, was interpreted by the market as supportive for the US dollar and negative for gold. As precious metals investors, we know that the Fed has already printed nearly $4 trillion dollar of fresh liquidity in support of the financial system over the past decade, and that the feasibility of the central bank reducing this liquidity by any significant amount is doubtful. Yet what is important over the short run is not so much our fundamental beliefs – but rather how the market itself is reacting.

For example, those who ignored the actual response of the gold market in 2011 suffered severe losses as the precious metals declined through late 2015. All the while, the Fed continued to print money. The market can move contrary to perceived fundamentals for many years. Caution is again advised at this juncture.

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