Gold fundamentals not bullish yet
Ask a gold bull why Gold hasn't performed wellover the past 15 months, and you might hear the words manipulation,suppression, or Bitcoin in the response.
You won't hear that Gold gained nearly 80% intwo years and was historically overbought.
Last but not least, you won't hear about thefundamental changes that have driven capital outflows from Gold and Silver, aswell as bonds and into stocks and commodities.
Concerns about growth and Covid in 2020dissipated as the market gained confidence in an economic recovery and the endof the deflation threat.
For Gold specifically, the problem is thatreal interest rates blew out to the downside (much like in 2011-2012, 2008,1980, and 1975). As inflation moderates and yields rebound, real interest rateswill rise, or at least not decline.
That is best illustrated by the real 5-yearand real 10-year yields and not the real fed funds rate, which, at times, canlag.
At present, the market has started to discountthat inflation will be sustained or sticky and not transitory.
One would think this is good for Gold, but thestock market is recovering again, and commodity prices (led by Oil and Copper)are making new highs. That combination reflects growth more so than inflation.
The narrative of growth and inflation, alongwith expectations of higher interest rates, has hurt Gold. When inflationpersists for several quarters and begins to impact growth, the narrative willshift to stagflation and the associated problems from inflation. Then Gold isbullish.
A signal for that turning point could be theFed starting rate hikes.
We plot the Fed Funds rate, Gold, and theBarron's Gold Mining Index. The vertical lines mark the start of Fed rate hikecycles.
As you can see, the start of rate hikes isvery bullish for Gold and gold stocks. The beginning of the last four rate hikecycles marked an average initial rebound in Gold of 27%.
Current fundamentals for Gold are not bullish,and that is reflected in recent price action. However, persistent inflation (aview which the market has started to adopt) will lead to bullish fundamentalsin Gold.
The market discounts in advance, and the turningpoint could be when the Fed hikes interest rates. History shows this is usuallya very bullish catalyst for Gold and gold stocks.
Expectations for a rate hike are surging. Themarket has priced in two hikes next year and is showing a 50-50 chance of arate hike as soon as June 2022.
For now, I'm focused on finding qualityjuniors with 7 to 10 bagger potential over the next two to three years. Therecent decline in the sector has priced out much of the risk in these stocksand enhanced the potential upside for new buyers.
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By Jordan Roy-ByrneContributing tokitco.com
Follow @KitcoNewsNOW
Jordan@TheDailyGold.comwww.thedailygold.com