The gold stock rally begins today.
I can hear the groans already… “What the heck are you talking about, Jeff? Gold stocks haven’t done anything all year. They didn’t do anything following the Federal Open Market Committee (FOMC) announcement yesterday. And, with the Fed getting even more hawkish, how in the world can you be bullish on gold stocks?”
Well, let me explain…
The price of gold tends to make an important bottom every year sometime in the April-June timeframe. It then usually goes on to rally into August or September. Sometimes the rallies are small and insignificant – like in 2015, when gold only bounced 4% in the summer. Sometimes, the rallies are HUGE – like in 2013, when the price of gold popped 14% in just two months.
But, as you can see from the following monthly chart, gold almost always enjoys a summertime rally…
My concern earlier this week was whether the price of gold bottomed last month when it dipped down to $1,281 per ounce, or would it make one final decline following Wednesday’s FOMC announcement?
Gold did indeed fall yesterday, but just by $2 – down to $1,299 per ounce. Now, though, with the FOMC announcement out of the way, there really isn’t any other obvious catalyst that could push the price of gold lower. So, it looks like the May bottom at $1,281 an ounce was THE bottom for gold’s recent decline. The metal should move higher from here.
Gold stocks should move higher as well.
Of course, a higher gold price helps gold stocks. But there’s a more significant reason to expect a gold stock rally… the FOMC just raised interest rates.
It seems counter-intuitive. In theory, rising interest rates should be bearish for gold and gold stocks. After all, gold doesn’t pay any interest. So, as rates rise, savers will choose to invest in interest-bearing accounts instead of buying gold.
But “theory” doesn’t always work so well in practice.
The financial market is a discounting mechanism. Investors expected the FOMC to raise rates yesterday. So, they acted on that expectation previously. Any weakness in the gold sector as a result of the interest rate hike was worked into the price of the stocks. Now that the rate hike is out of the way, gold stocks are free to rally.
In fact, that’s what happened the last two times the FOMC raised rates. Take a look at this chart of the VanEck Vectors Gold Miners Fund (GDX)…
The last two times the Fed hiked interest rates was back on March 21 and December 13. Notice how those dates marked an important bottom for GDX. Gold stocks then rallied sharply over the next month or so.
I expect we’ll see something similar in the gold sector after yesterday’s rate hike as well.
So, like I said earlier… the gold stock rally begins today.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Today, letters responding to Jeff’s recent Father’s Day essay continue to pour in…
Thanks for that, Jeff. A much deserved sidebar about what’s truly important in life. And also about listening to your gut.
– Sue
This was beautiful, Jeff. Thank you.
– Isaac
Nice Jeff! Thanks, from a very fortunate 83-year-old dad. But a small, respectful suggestion: dump the guilt. There’s never a place for it in a loving heart, even though it works its way in through from early-learned belief patterns. And forgive yourself in the process, while passing that on to your sons. Take care of yourself. Now how’s that for a string of unasked-for advice? I enjoy your daily notes, thanks.
– Marc
Jeff, I’m sorry for your loss. But thank you for passing on this lesson about a proper focus in life.
– Curtis
Jeff, I wish to thank you for sharing your July 25th, 2013 regrets – regrets that only honesty can know. Life is not an easy court to dribble through and we fail to do or say a lot along the way. People say you should steer away from guilt and not reflect on things that twinge from the deep in us. But regret, like a thunderstorm, whisks away the sourness that stagnates air and rains to nourish growth. Reflection and regrets bring health and make us a better soul. Happy Father’s Day.
– Joe
Jeff, Thanks for sharing. I imagine you didn’t want to awaken your dad by calling late and you clearly had some other selfless things to do earlier. It was compassionate not to risk awakening your dad, and I’ll bet it was your unselfish priority at the time. When we care deeply about another, we do what we think is best for them even if it may not work out as well for us.
For whatever reason, maybe just luck, I escaped grad school finals hell to help my dad to bed on what turned out to be his last night. I couldn’t have known before, but there I was. I mostly feel badly for my siblings who didn’t or couldn’t be there, for reasons I would never want to ask about. By the way, I really appreciate your passion for tutelage! I have no regrets that I signed up to your guidance for life. I think it will be the best tuition money I ever spent. Here’s to no regrets.
– Mark
Thank you, as always, for your thoughtful insights. Keep them coming right here.