The price of gold ticked up last week as some big cap mining stocks surged last Friday with Newmont Mining (NYSE: NEM) hitting a new 52-week high. The move up has caught many by surprise, because gold and silver dipped after the confrontation between Iran and the Trump administration earlier this month came and went.
Gold briefly went above $1600 the night that Iran struck a US military base in Iraq with rockets and then came back down below $1550. It then went sideways until it turned up last week. Some people that follow the gold market were confused by this action as they expected international events such as this to make gold soar, but it did not. That made a lot think a major top had been made for exchange traded funds such as the SPDR Gold Trust (NYSEARCA: GLD).
The reality is gold has never begun a new bull market before because of an event overseas. Historically gold has tended to go up when the value of the US dollar index has gone down, but over the past twelve months the action in the gold price charts has been more closely tied to the action in the US bond market than anything else. Check out this price chart.
The two indicators on the bottom of this chart are measuring the correlation in the 200-day average price between gold and the TLT ETF and the US dollar index.
The TLT ETF is the iShares Barclays 20+ Yr Treasury Bond Fund (NASDAQ: TLT). By trading with a correlation of 0.93 with the indicator gold is trading almost completely in synch with this ETF now. When TLT goes up gold goes. As you can see this exchange traded fund turn up last week too.
This fund goes up when interest rates decline and goes down when interest rates go up. With the Federal Reserve now basically pledging not to raise interest this year there is very little downside risk for this ETF and for the price of gold itself. This is making gold a wonderful trade for people and I believe more importantly a critical long-term investment for this next decade as gold will go nuts whens the next down cycle for the economy and stock market finally comes. Low rates is making it so as Ray Dalio has put it “cash is trash,” which makes some put money into gold for a necessary diversification strategy.
Silver tends to trade with gold too, except in a more volatile manner. So when gold goes up silver goes up at a higher rate than gold. This is why my favorite small cap silver mining stock remains compelling.