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Gold Stocks: The New Safe Haven

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From the Archives : Originally published April 03rd, 2018
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Will this Friday’s US jobs report be the catalyst that sends gold above the key $1370 resistance zone and ushers in a new era of institutional enthusiasm for gold stocks?

The US stock market suffered yet another “cardiac arrest” moment yesterday.

Market breadth has thinned horrifically, and the low rates and QE that have incentivized corporate buybacks have been replaced with rising rates and QT. That’s akin to replacing a firetruck’s water with gasoline.

I’ve outlined the case for a possible minor rally in April from current price levels, but the market is so weak internally that it is risk of a much bigger cardiac arrest event.

I don’t think Jay Powell will announce a rate hike at the early may Fed meeting, but he might. If he does, stock market investors should be ready to trade in their “Sell in May and go away” mantra for… “Sell in May after getting blown away by Jay.”

If he wants to do four hikes in 2018 but avoid doing a hike in the September stock market “crash season” month, he is likely to seriously consider doing a hike in May. Are investors prepared for such a surprise? If they own lots of gold, the answer is yes!

So far in 2018 almost eighteen billion US dollars in institutional money has flowed out of the main S&P500 ETF. This market is very sick, and getting sicker.

The bottom line: US stock market rallies should be sold and the proceeds should be placed in cash, gold bullion, and gold stocks.

This is the horrifying T-bond chart. On a day that the Dow Industrials fell more than 700 points at one point, the T-bond could barely rally at all.

Institutional money managers and sovereign wealth funds are beginning to realize that rate hikes and QT are a tremendous headwind to the US government’s ability to finance itself.

During the latest stock market mini crashes, they have clearly started to move their focus from T-bonds to gold.

As more rate hikes and QT create much bigger and more frequent crash events in the stock market, I expect this institutional interest in gold to accelerate.

Technically, gold’s price action is very impressive. A small head and shoulders top formation was quickly destroyed with yesterday’s safe haven rally.

Indian demand for the Akha Teej festival is solid. It should serve as great support for an imminent surge through upside resistance at $1370.

An important look at that resistance zone. Gold is coiling in what I call a bull “super flag” pattern, and seems eager to burst higher in a rally that should carry it to $1425.

What’s particularly exciting is that in addition to bullion, the GDX ETF is beginning to act as a safe haven!

Newbie” investors to the precious metals asset class have memories of the deflationary declines in 2008. They get nervous when they see the stock market fall, and wonder if gold stocks will also fall.

The goods news for these investors is that the current situation is more akin to the late 1960s or early 1970s than 2008.

While institutional money is pouring out of stock market ETFs, it’s starting to pour into the GDX gold stocks ETF.

Inflation is on the move, and savvy institutional money managers are moving their safe haven focus from bonds to gold and gold stocks.

This is the GDX chart. I’ve urged gold stock investors to be eager buyers of all two and three-day pullbacks. Aggressive players can buy GDX call options and look for 20% gains on those options as a profit booking target.

For individual stock enthusiasts, the focus should be on the component stocks of the precious metal ETFs that show the best overall performance from 2016 to the present time.

In the 1970s the famous newsletter writer Harry Schultz was known as the “Dean of Gold”. He promoted the use of two and three-day pullbacks to purchase South African gold stocks. The current price action in GDX and many of its component stocks is beginning to display an eerie similarity to the price action of gold stocks in the early 1970s.

Gold stock enthusiasts who missed the most recent two-day pullback buying opportunity will have to wait for the next one to get in on the upside fun. Following that pullback, gold and gold stocks could be ready to surf an Akha Teej themed wave, right through $1370 and on towards my $1425 area target price!

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form, giving clarity of each point and saving valuable reading time.
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