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Be Patient, The Upside Boom Is Coming

Hard Assets Alliance was created as a cooperative of investment professionals who believe there’s a better way to invest in precious metals. This is a guest perspective on the markets from one of these partners; we hope you enjoy it.


I haven’t discussed what’s been going on in the gold market recently, mainly because not much has been going on…

Gold continues its sideways-to-downward correction — ditto for silver and mining shares. So here’s a timely update on the strong fundamental factors supporting gold (hint: They’re improving) and what’s next for the yellow metal.

 

 

As you can see in the chart above, gold dropped slightly below $1,450 per ounce this week, its lowest level since July. In the top panel you can see Gold’s relative strength index (RSI), which is currently around 40 and still falling.

This tells me that yes, gold prices continue to lose momentum, but gold itself is not yet oversold (with an RSI under 30). I’m looking for a rebound in RSI back above 50 — a signal that gold is regaining momentum again.

On the other hand, both the Junior Gold Mining Index (GDXJ) AND Junior Silver Miners Index (SILJ) have NOT yet fallen to new lows. If that remains the case, it would be a very bullish divergence signaling a bottom in mining shares and likely in metals prices too.

The reason why a bottom may be close at hand is the improving fundamentals that support higher precious metals prices long term!

Let’s start with the bullish demand side of the picture…

 

 

As you can see in the chart above from the World Gold Council (WGC), retail demand for gold-backed ETFs just hit a fresh record high for 2019. In fact, ETF holdings grew by 258.2 metric tons to an all-time high of 2,855 tons in Q3 2019.

That tells me average investors aren’t spooked by the recent pullback in gold prices. In fact, they’re buying into it!

Retail investors aren’t the only ones buying… In the graph below you can see that global central banks are likewise stocking up on the yellow metal.

 

 

Central banks added 156.2 tons to global reserves last quarter alone. And year to date, 547.5 tons of gold have been added to the vaults of global central banks, up 12% over last year!

Supply-side factors are also supportive of higher gold prices to come. It’s true there was a slight 10% uptick in gold recycling last quarter due to higher prices, but that’s just a drop in the bucket compared with overall global gold supplies.

 

 

The biggest supply factor by far is gold produced by the global precious metals mining sector.

And as you can see above, mined gold supply had remained virtually flat over the past four years. In fact, mine production of 877.8 tons was unchanged on a year-over-year basis.

With demand continuing in a solid uptrend and global gold supply basically flat, I anticipate that the demand/supply balance will soon tip in favor of higher gold prices. When that happens, I expect high-quality gold mining shares to explode again into the upside.

Bottom line: Wait patiently for this brief correction in precious metals to run its course — and that may be sooner rather than later.

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