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Gold prices fell sharply in early March during a time of panic where the yellow metal generally thrives. Things have changed since then and gold is poised to hit new highs not seen since 2012 despite forces against precious metals.
A stronger dollar is doing little to contain the Gold Rally
The price performance in early March was surprising for gold traders. The shiny metal generally works well in uncertain times and there was a big shift towards risk aversion during this time as the Coronavirus threat increased.
However, investors showed a strong preference for the US dollar that inevitably weighed on gold prices.
Interestingly, the dollar has shown strength once again since mid-April. The recovery is not as strong as at the beginning of last month, but on a trade-weighted basis, the dollar rose approximately 2%. Starting with the European Open on Friday, the Dollar Index (DXY) is about to hit new highs in April.
Dollar and gold prices have a long-standing inverse relationship to each other. The fact that the yellow metal can bounce back along with a stronger dollar is the first reason I am bullish gold.
Shares have recovered nearly 30%
Another common inverse correlation is between gold prices and stocks. In the bigger picture, these two assets generally don’t move in the same direction.
A divergence was observed in the second half of 2019 and both the S&P 500 and the price of gold increased markedly during that time.
The same is happening once again as we have seen the S&P 500 and gold prices drop at roughly the same time in late March.
The big difference here is that gold outperforms from the bottom when adjusted for volatility. Despite the yellow metal being up roughly 19% versus nearly 30% gain in the S&P 500, gold has broken above its March high, while the stock index still needs to increase another 22% to do the same. Superior performance is the second reason why I think there are more advantages to precious metals.
Gold mining stocks are breaking
The final and most important reason I expect more gold rises is because the Gold Miners ETF (GDX) is signaling a technical breakout.
GDX has crossed above a horizontal level near $ 32, keeping it lower in 2016 and earlier this year. As a result, the ETF has hit a new seven-year high this week.
I put a lot of emphasis on this technical development because GDX has underperformed. Note that spot gold broke above its 2016 equivalent high during the summer of last year and has increased approximately 30% since then.
When weak instruments within the same asset class begin to show strength, there is a good chance that a big move will occur.
