For well over a month I have said from time to time that I just don’t see anything to do in the markets, because everything had gone up so much that I couldn’t see doing many new buys until there was some sort of dip or correction. I did almost all my buys last year. Now we are finally getting one, at least when it comes to commodities and gold.
Gold dumped last week as part of an overall correction in the commodity space. A lot of people are thinking that gold is falling, because the Federal Reserve is getting hawkish and ready to raise interest rates, but the bond market itself is not trading that way. The Fed Fund futures only see a 34% chance of a rate hike by July 2022. They don’t trade any further out than that.
At the same time, long-term Treasury bond yields have actually fallen since the last Federal Reserve meeting! If they are forecasting anything, it is that the rate of inflation growth we have seen in the CPI in the past two months is going to tick down for a few months. You’d expect that with the current correction/consolidation phase in commodities. As you can see, the TLT ETF, has been rallying and now the RSI for it is over 70.
The TLT ETF looks like it is positioning to trade in the 143-150 area for the next few weeks, where it would likely form a new top.
On Friday, the correction in commodities spilled over into just about everything else, as the DOW got hit too for a 500 points drop, but it is still barely off of its highs.
It looks to me like the best buy point will come again in gold, silver, and mining stocks just like they brought one in March when gold made a double bottom.
How do you time a bottom in gold?
My favorite indicator to do that is the GDX/GLD relative strength ratio, which compares the performance of the GDX gold stock ETF with that of GLD. Mining stocks tend to lead gold to the upside and when there is a gold correction they tend to fall faster than gold at first then drop less than gold or actually go up when the correction comes towards an end.
So, the trick is to look for this ratio to actually trade flat or upwards as gold goes down a day or even a few hours.
Here is an hourly chart of it.
You can see on this chart what this ratio did on the last gold and mining stocks bottom at the start of March. The ratio went up as gold made its first bottom that March. After that low gold stocks outperformed gold and formed a clear positive divergence against the metal at the end of that month when gold made a double bottom. The key, though, is that the ratio actually gave a buy signal around March 8.
I’ll be watching this ratio VERY closely now over the next few days, as it probably won’t take long for it to give us a buy signal now.
This doesn’t mean there is a huge downside in gold from here. Maybe it goes down another $25-$50 or so from here or it could just trend sideways for a few days and turn up. I don’t really try to predict exact price bottoms ahead of time, as I don’t think anyone can really do that. Instead, I look for indicators that tell when a bottom is happening so I can buy at that time.
-Mike
