Investors in the gold space were happy to finally escape 2021, a year to forget with lower highs and lower lows. However, the new year hasn't started off much better, with gold finding itself down 2% in the first week of trading, rejected once again near the $1,830/oz level. In this update, we look at critical levels for the metal and where it might make sense to buy the dip.
(Source: TC2000.com)
The price of gold has started off the new year headed in the wrong direction, down more than 2% since its December close, after correcting nearly 20% in 2021. This is despite a backdrop of deeply negative real rates (shown below), which typically results in much stronger performance for the metal. However, with fears of an initial rate hike looming, the worry appears to be that this will be negative for the gold price.
(Source: YCharts.com, Author's Chart)
While a rate hike would certainly lead to some mean reversion in real rates, they will still remain deep in negative territory following a hike. Besides, while gold has often been volatile around rate hikes, it's worth noting that the initial rate hike has been closer to a buy signal than a sell signal. This was the case in Q4 2015, which ended up marking the low for miners and the gold price and kicked off a strong bull market in 2016 and ending the violent correction.
(Source: TC2000.com)
The other point worth pointing out is that similar to the Q4 2015 rate hike, gold had a negative 18-month return heading into the news, suggesting that the anxiety about a rate hike was already baked in. This appears to be the case this time around as well, potentially making this a "sell the rumor, buy the news" event, which is what we've seen from gold's performance over the past year.
If we take a closer look at the technical picture, we can see that gold continues to trade in a clear uptrend on its larger time-frames, even if the daily chart is more volatile. In fact, despite the current pullback, gold continues to hold above the pivotal $1,760/oz level.
Looking back over the previous bull market, we can see that this area was a zone of major resistance in 2011/2012 after the August peak 2011. However, following the August 2020 peak, we have seen the opposite thus far, evidenced by any pullbacks below this level finding strong support. This suggests that the prior resistance zone may have morphed into new support following 2020's multi-year breakout.
So, what's the best course of action?
(Source: TC2000.com)
In addition to buying any dips below $1,770/oz on gold, I see diversified large-cap gold producers as having solid investment theses. Agnico Eagle (AEM) stands out among its peers, having a 3.6-million-ounce production profile, more than 12 mines, a 2.8% dividend yield, and industry-leading margins. Meanwhile, it also has a robust project pipeline, which should help it become a 4.4-million-ounce producer by 2028 across 15 operations.
With AEM trading at its cheapest valuation since March 2020, this pullback looks like a rare buying opportunity. Assuming the company can execute on its plans, I see an upside to more than $75.00 per share, translating to a price target 50% above current levels.
To summarize, while the volatility on gold has unnerved some investors and forced many to pack their bags, I believe it's created an opportunity, and I would expect a much better year ahead. The best way to play the metal appears to be buying dips below $1,770/oz and accumulating the best miners like AEM below $51.00.
Disclosure: I am long GLD, AEM
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.
GLD shares were trading at $167.11 per share on Thursday morning, down $1.95 (-1.15%). Year-to-date, GLD has declined -2.25%, versus a -1.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.
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