The spot gold price continued to bounce early Friday, but gave back some of its gains after the jobs report. The jobs data didn't alter the challenging backdrop in place since the Federal Reserve revealed a faster rate-hike timetable on June 16. Still, both GLD, which tracks the gold price, and GDX, a gold-miner ETF, rose early Friday, after falling near 3-month lows earlier in the week.
XThe gold price traded near $1,783 early Friday, up from around $1,755 on Wednesday, but still well off levels above $1,900 at the start of June. Despite a firmer dollar, gold has gotten some relief as the 10-year Treasury yield has fallen near 4-month lows.
Two Wild Cards In Gold Price Outlook
Gold stocks suffered serious technical damage amid less-dovish signals from the Federal Reserve on June 16. Establishing a floor could take time. But there are two wild cards in the outlook. The Delta Covid strain, which has led to a spike in cases in the U.K., is one. Gold could benefit in the near term, if the fast-spreading Delta variant restrains global growth and slows the path to Fed tightening.
Fiscal policy is the other. The infrastructure deal endorsed by President Biden last month may unlock the bulk of the White House agenda. The outlook for bigger deficits may weigh on the dollar. Still, we're in part of the Federal Reserve tightening cycle that doesn't tend be great for gold.
Federal Reserve Trips Up Gold Stock Rally
The best long-term hope for gold may be a revival of expectations that Democrats can pass close to $4 trillion in new spending, keeping the fiscal floodgates wide open.
But the primary near-term bull case for gold — that the Fed won't respond to rising inflation, sinking the dollar — looks less plausible after the Fed's hawkish turn on June 16.
While Fed chief Jerome Powell is still pretty clearly a dove, 11 of 18 Fed committee members indicated support for two Fed rate hikes in 2023. Previously, rate hikes had been off the table before 2024. If inflation stays hotter than they expect, Fed policymakers may keep growing more hawkish.
Wall Street expects that the jobs recovery will advance quickly enough for the Fed to start tapering asset purchases by early 2022. As the Fed gradually takes away monetary accommodation, negative real interest rates will go away, keeping the gold price in check.
Consider that after former Fed chief Ben Bernanke's taper-tantrum speech in May 2013, the SPDR Gold Shares ETF (GLD) that tracks the gold price would fall an additional 25%. GLD eventually bottomed in December 2015, just as the Fed hiked its benchmark rate for the first time of the cycle.
Inflation data could take a turn for the better as supply-chain snags are worked out and emergency jobless benefits end, easing an apparent labor shortage. That might actually be better for gold stocks and the gold price at this point than higher inflation readings.
To really thrive, though, gold might need a policy mistake. That might take what Powell calls "fiscal dominance," with deficits and debt running so high that the Fed feels compelled to keep interest rates lower than economic conditions call for. Huge fiscal packages from Democrats would hardly assure such an outcome, but they might keep it in play.
GLD Technical Analysis
The GLD gold-price tracker flashed a technically ominous sign known as a death cross back in late January. That happens when the 50-day average falls below the 200-day line. The gold price slide continued into early March.
Yet after testing a nine-month low at the end of March, the healing began. On May 17, the GLD gold-price tracker broke above its 200-day moving average, then kept climbing.
After retracing 60% of its slide from August's record around $2,070 an ounce to March's low near $1,680, GLD ran out of steam at around $1,915. As the Fed met on June 16, GLD had been finding support back at its 200-day average. But hawkish signals from the Fed sent GLD sliding far south of the key technical indicator.
After diving to a two-month low on June 18, GLD staged a modest rally, but that floor gave way on June 29. A moderate bounce off the new floor seems possible, if concerns over the Delta variant continue to grow and suppress long-term interest rates.
GLD has run into resistance lately around 168.03, the June 23 high. Clearing that level could lead to further upside, but potential gains look limited given the interest-rate backdrop.
GDX, Gold Stocks Analysis
Franco-Nevada (FNV), ranked No. 1 among gold stocks by IBD, has been impressively resilient. But FNV stock has slipped back below its 50-day moving average. FNV stock is 4% below a 154.26 cup-with-handle buy point, according to MarketSmith.
VanEck Vectors Gold Miners ETF (GDX), which tracks a basket of gold stocks, dived through its 200-day line on June 17, as GDX tumbled nearly 11% during the week of the Fed meeting. Since then, GDX has moved down then up, but failed to make any progress.
Newmont (NEM), which had been outperforming fellow miners, has become a laggard. After surging as high as 75.31 on May 19, NEM stock has fallen back to 63.29, just above its 200-day line.
Here are some key things to consider for deciding when, whether and how to invest in gold, either via gold stocks — such as Newmont, Kirkland Lake Gold (KL) and Barrick Gold (GOLD) stocks — or gold ETFs.
Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live.
Gold Stocks, Gold Price Hinge On Fiscal, Fed Policy
The gold price charged back to $1,950 in early January. The surge came amid rising odds that Democrats would take control of the Senate in Georgia's runoff elections. and unleash a new flood of fiscal support.
Yet Democratic victories in Georgia, rather than fueling new highs for gold and gold stocks, sparked a sell-off. The problem: The additional trillions in anticipated federal spending boosted growth expectations and Treasury yields.
Gold stocks aren't a play on a booming economy, but are driven by interest rates and inflation. Industrial metals such as copper have surged since last summer as gold has wavered. Silver, which offers both precious metal and industrial metal characteristics and has a key role in 5G, also has outperformed gold.
Gold and gold stocks powered higher in the weeks after the coronavirus lockdown as the Federal Reserve and Congress uncorked a gush of liquidity and fiscal support. The yellow metal took off again as hopes for a V-shape recovery were splashed by a summer coronavirus wave. Wall Street began to imagine an extended era of ultralow interest rates, multi-trillion-dollar deficits, a weak dollar. And — eventually — a rekindling of inflation pressures.
In April 2020, Bank of America put a $3,000-per-ounce 18-month price target on gold. However, Bank of America reassessed in November, predicting an average price of $2,063 for 2021. The firm turned neutral on gold amid belief that super-effective vaccines and stimulus would produce a strong cyclical recovery and push up long-term interest rates. Those conditions favor industrial metals over precious metals, the bank said.
Real Interest Rates Are Key Factor
The gold price hit bottom at the end of 2015, just as the Fed hiked its benchmark interest rate for the first time since the financial crisis. But the gold price and gold stocks didn't really begin to shine until the fall of 2018, when the Fed's plan to keep hiking interest rates triggered a sharp stock market sell-off.
Gold's persistent strength starting in late 2018 was driven by a fundamental change in the Fed's thinking about inflation. Even as unemployment fell to a 50-year low, inflation pressures were a no-show. After slashing its benchmark overnight lending rate close to zero, the Fed has said it won't hike interest rates until inflation is firmly above its symmetrical 2% target.
Based on the most recent Fed projections, the first hike isn't expected before 2024. However, the Fed could alter that outlook based on incoming economic and inflation data.
The Common Thread
The common thread linking gold price highs and lows is real interest rates. As in 2020, real interest rates were negative during prior gold-price highs in 1980 and 2011, with two-year Treasury yields well below the rate of inflation. That's still the case.
In 1999, which saw the lowest gold price in recent decades, the Fed was in a rate-hiking cycle, raising its benchmark rate north of 5%, well above roughly 2% inflation.
Why do real interest rates matter so much for the price of gold? Gold is a store of value, but holding it comes with an opportunity cost. That money could instead be invested safely in Treasuries, for example. If real interest rates are attractive, holding gold is much less attractive. When real interest rates turn negative, holding gold usually pays off.
But real interest rates aren't the only determinant of the price of gold. The supply-demand balance is among other important factors. For example, central bank sales of gold exacerbated the 1999 gold price slump.
Gold Investing: Gold Stocks And ETFs
Gold stocks and gold ETFs are the simplest way for individual investors to bet on a rising gold price. Investing in gold stocks can be riskier, but it's also potentially a more rewarding way of investing in the precious metal.
Investors have three major options, aside from buying gold coins or jewelry. They can buy gold stocks individually. They can buy an ETF that tracks gold stocks, such as the GDX gold miners ETF. Finally, they can get direct exposure to the precious metal itself via an ETF, such as the GLD ETF that tracks the price of gold.
Well-known gold mining stocks include Barrick Gold, Newmont and Kirkland Lake Gold stock. Another segment of the gold market is gold royalty companies. These provide financing to gold miners, typically in exchange for below-market-cost purchase rights of gold they produce. Examples of gold royalty companies include Royal Gold and Franco-Nevada stock.
You can research the top gold stocks, which are part of the broader Mining-Gold/Silver/Gems industry group, at IBD Stock Checkup.
Gold Mining Stocks: A Leveraged Bet On Gold
Investing in gold stocks or a gold-mining ETF is, to a large extent, a leveraged bet that the price of gold will keep rising. That's because a higher gold price can have a dramatic impact on the profitability of gold miners. For example, Newmont has projected its all-in sustaining cost of production will be $970 per ounce of gold in 2021. That means increases in the price of gold above that level should go straight to the bottom line.
Yet corporate leverage works both ways: Falling gold prices can shrink the bottom line in a hurry.
Investing in gold-mining stocks, especially a specific stock, brings in more complications than investing in the precious metal itself. The companies can suffer accidents or production snafus, deplete their reserves or pile up debt. Recently, Barrick Gold is mired in a dispute with Papua New Guinea over renewing the lease on its Porgera gold mine. On the upside, companies can increase mine output, find new reserves, or generate cost savings via mergers or mining productivity gains.
Looking For The Next Big Stock Market Winners? Start With These 3 Steps
How Gold Stocks Perform Vs. The Gold Price
In general, if you think gold has room to run, history would say you're better off owning gold stocks than the yellow metal itself. However, if you think gold could be nearing a top, you're probably better off holding gold than gold stocks, based on past performance.
Consider, from the gold price bottom in late 2015 through the August 2020 peak, GLD, the SPDR Gold Shares ETF tracking the commodity's price rose 94%. Meanwhile, the VanEck Vectors Gold Miners ETF rose 244% over the same span. That reflects the dramatic corporate earnings improvement thanks to the higher price of gold. Improved earnings, in turn, allow mining companies to increase dividends as the price of gold rises.
Sometimes corporate dynamics — and changing perceptions of them — can take precedence. Even as the price of gold came down a bit, Franco-Nevada stock broke out to a record high in late December 2019. Newmont stock hit a multiyear high in that time frame.
Still, gold stock investors can never let down their guard. The descent for gold mining stocks from the 2011 price peak was much rougher than for the metal. To the trough in late 2015, GLD, which tracks the price of gold, tumbled 46%. Meanwhile, GDX, the ETF tracking gold miners, cratered close to 80%.
Go For Gold, Not For Broke
No matter your view of whether the price of gold is a good bet, it makes sense to subject investment decisions in gold stocks or an ETF tracking gold or gold stocks to the same rigorous process as regular stock buys. That means waiting for a proper buy point and a buy signal.
The charts of gold stocks like NEM and GDX no longer look constructive. While FNV, IBD's top-rated gold stock, looks more solid, all gold stocks are pretty closely tied to the fortunes of GLD, which has fallen well below its 200-day moving average. Prospects look somewhat brighter for the iShares Silver Trust ETF (SLV) that tracks the silver price. SLV has bounced above its 200-day line and is about 6% below its recent buy point. Silver has both precious metal and industrial metal characteristics.
To find the best stocks to buy or watch, check out IBD Stock Lists and other IBD content.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.
YOU MAY ALSO LIKE:
Is It Time To Buy Or Sell These Large-Cap Stocks?
Catch The Next Big Winning Stock With MarketSmith
Why This IBD Tool Simplifies The Search For Top Stocks
IBD Digital: Unlock IBD's Premium Stock Lists, Tools And Analysis Today
