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Rates Up, Gold Up. The Spring Run Has Sprung.

It happened, just as expected: Yellen raised rates and gold immediately got its groove back.

In the space of five hours gold gained as much as $24.50 and closed the day up $21.10 or 1.76% at $1,219.70 per oz. And the miners demonstrated the leverage we so love:

Money poured into paper gold as well. Over the last month, as gold lost ground in the lead up to the rate event, much was made of outflows from GLD, the gold ETF. And yes, in the month up to yesterday GLD logged outflows of $221 million.

Today alone reversed that loss, with $263 million flowing into GLD.

The dollar index also performed right on cue, losing an entire point following news of the rate hike. If that doesn’t confirm the theory that traders act before the news, I don’t know what does!

One afternoon of trading does not a pattern make, but today’s moves increase my confidence that we’re set up nicely for a spring gold run. I won’t belabor this point, since I talked it through in the last two letters, but I did want to include some charts that a friend of mine put together.

The first chart shows the HUI – the Gold Bugs Index – from 1995 to 2004. The bear market from 1996 to 2001 was a bad one, as long and deep as the bear from which we just emerged. What the chart highlights is the PDAC Curse. The blue line marks the annual conference. Note that in the bear market, gold producers clearly declined following PDAC (and usually right through the summer). It happened every year except 1999, which was a sideways moment in the down market.

When the market turned, the PDAC Curse disappeared. Instead, in the bull market the HUI gained notably each spring.

Today’s pattern is setting up similarly. Through the bear market years of 2012 through 2015, gold producers as per the HUI fell reliably following PDAC. Last year – the first year of the bull market – the curse was gone and HUI gained from PDAC straight through summer.

I don’t think we’re embarking on a spring run that will bowl right through the summer doldrums, but I do think the bull market pattern of a spring gold run is going to play out again this year.

[Full article continued with discussion of volumes, analysis of the FOMC statement, and a look at both inflation and growth goals and realities. Conclusion included below.]

... Rates hikes are supposed to slow down an overheating economy before inflation goes nuts. That is clearly not the current situation. The Fed is not trying to cool a hot economy; it is trying to normalize a distorted marketplace and stockpile some ammunition in case it needs to lower rates to stimulate the economy should it stumble.

Is that where we are heading? I have no idea. At some point the US markets will turn down – rate hikes are inherently bad for stocks, especially after a long strong run – but I have no idea when that will be. Trump now says his tax plan will come out in August, which is a very long time from now; perhaps the Trump honeymoon optimism can last that long.

I do know that GDP Now is pretty good at what they do, which means I think growth is less than the Fed and Team Trump are currently counting. I know that at some point investors will decide that higher interest rates are not good for stocks – debt loads are high, higher rates mean the end of the stock buybacks that have fueled the incessant rise in earning per share (reduce the denominator), and higher rates mean yields are available elsewhere.

And I know that gold is fundamentally strong.

On that note: gold grabbed attention for its strength today, but I think it deserves perhaps more attention for its strength over the last month. Yes, I mean the month during which it lost 3.3% in a pretty consistent slide. During that period, we had:

  • Increasing confidence that a rate hike was imminent
  • Resulting dollar strength
  • US stock markets flirting with all-time highs
  • Strong numbers on employment and job creation

Those all work against gold. Knowing a month ago that such data was pending, many would have predicted a much worse month for the yellow metal. A 3.3% slide is showing strength.

From European elections to Russian connections, from less-tax-more-spend plans to sustained negative real rates, gold has a lot in its corner. The plan right now: take advantage of the coming spring run to lock in some gains and exit some positions, raising cash for the next round of opportunities that will materialize over the summer.

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Gwen, you are truly a beacon of sound thinking and honest insight in a market sector full of charlatans.

-AH (September 2022)

Hi there, just a quick note to say how impressed I am with all the work you and your team do.
I started a few months back, and I'm sure in it for the long haul.
All the best

-G (Netherlands) (Jan 2018)