Has gold euphoria gone too far?

James Gerrish

Market Matters

Gold was threatening to recover over recent weeks only to plunge over $US60 an ounce on Friday. When I reviewed the market on Saturday morning, I could almost hear a collective sigh from the gold bulls, with an undertone that suggests something like this is all too hard! 

Unlike stocks where virtually all indicators are disconcertingly bullish, suggesting a correction/rest the precious metal market is if anything the opposite. On Monday we saw the US-dollar and bond yields rally, but gold bounced over $US10/oz, an encouraging sign.

Our ideal cyclical roadmap has gold moving into a major top in the next 6-12 months. But we strongly believe this will be a relatively minor interruption of a long-term secular bull market, one which should last for many years. 

Fundamentally, we see rising inflation as the major tailwind for precious metals but a declining US-dollar and rising bond yields as the obvious headwinds. This tug-of-war should push precious metals to new post-COVID highs, but the move is unlikely to have the momentum or economic backdrop to follow through. 

Friday did actually feel like a panic washout in the sector, with an exhaustive character. 

We see this as a short-term buying opportunity, but are mindful of the late November pivotal support at $1764. This is the stop loss for our forecast final high into later Q1.

MM remains bullish gold & silver

Gold ($US/oz) Chart

Silver ($US/oz) Chart

The 4-month correction in gold/silver feels tired and probably over in our opinion but it’s been another great example of market euphoria/optimism going way too far and investors who have the strength and resolve to take some money into such buying often find themselves outperforming the index.

The chart below illustrates very well the levels of optimism/pessimism going too far within the Australian gold sector, RRL usually tracks gold and clearly, at present, it’s calling the precious metal lower providing some good risk/reward contrarian opportunity in our opinion.

Gold ($US/oz) v Regis Resources (RRL) Chart

We feel the US-dollar has simply fallen too far, too fast. And although we remain structurally / technically bearish the greenback, our preferred scenario remains a few per cent bounce similar to what we’ve illustrated below, a move which has looked to be “in play” since early December. 

Considering the strong correlation across financial markets, if this bounce does unfold it might be accompanied by a decent pullback in stocks. Normally a strong move in the US-dollar would prompt me to be concerned about precious metals, but considering gold has been retreating since August, while the greenback was declining, I’m not too worried around the short-term correlation.

The $US Index Chart

Today I have revisited 3 of the major Australian gold names to ensure we remain comfortable with our positioning in the sector.

1. Newcrest Mining (NCM) $26.13.

Australia’s largest and best-known gold producer has corrected well over 30% while the underlying precious metal fell less than 15% at its worst. Unfortunately, over the years NCM has been a serial market underperformer, our preferred scenario is a bounce of at least 20% assuming our anticipated roadmap for gold proves correct i.e. NCM won’t be able to emulate gold and break its 2020 high but we are happy to stay long for now.

MM is looking for at least a 20% rally in NCM.

Newcrest Mining (NCM) Chart

2. Evolution Mining (EVN) $4.67.

EVN is a similar story to NCM falling ~30% after becoming too optimistic in 2020. Nothing particularly fresh to add, we're looking for a decent bounce but would only be buying EVN as relatively “short-term” investment.

MM likes EVN for a bounce towards $5.50, or 15% higher.

Evolution Mining (EVN) Chart

3. Northern Star (NST) $12.80.

Again, NST is a similar story to NCM falling ~30% after becoming too optimistic in 2020 although this previous outperformer didn’t top out until November, way after gold itself. Again, nothing particularly fresh to add, we're looking for a decent bounce towards $14.50.

MM likes NST short-term for a bounce towards $14.50.

Northern Star (NST) Chart

Conclusion

MM believes that gold and silver will make fresh post COVID highs in the months ahead but the underlying Australian gold sector unfortunately now looks likely to lag and we plan to sell/reduce our exposure across our portfolios into strength.

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Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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