The markets are surging, gold is trying to break through resistance and COVID-19 is threatening our way of life. Perhaps that order should be reversed.
Who ever would have thought that we would experience a V recovery? We can’t claim that yet, however the stock market is a forward looking system, and the collective consciousness is predicting a resolution sometime in the next 2-6 months. So, what is gold telling us?
By this chart, at least at the time of this writing, it looks like Gold $2000 will win. And I guess the thinking by most is that the massive stimulus that is coming will create intense inflation. The other explanation could be that Gold is simply keeping pace with the markets, as it’s done like, forever. Holding value.
Gold Seasonality
Let’s take a historical perspective. What are the average returns from month to month? Are there particular times of the year where gold prices tend to rise or fall? These are legitimate questions we need to ask if there are solid statistical trends. The reality is that there is some form of seasonality, however it shifts from period to period, or range of years and decades. So, below shows the average monthly returns of three periods of time, from 1990 to present, from 2000 to present, and the last 10 years from 2010 to present.
It’s clear to see that the range of months from March to July generally see Gold performing markedly worse compared to other periods. It’s also clear that as the decades rolled on that the fall time performance starts to degrade, however there are some notably exceptional months which include January, February, and August. September is skewed in the longer term chart and March always seems to be a real downer, except for the year 2020 where it is up HUGE!
There are often exceptions to the rule…which said another way, there are no rules, only similarities, or history doesn’t repeat, it only rhymes. I could go on and on with stupid cliches, but you get the meaning I’m sure.
What Are The Odds?
Let’s examine the two scenarios, Gold rises to new highs, breaking above $2000 per oz, or Gold fails to break through resistance and follows through with average seasonal declines and drops to support around $1400 per oz.
If Gold rises, one might attribute that to the incredible amount of stimulus that has been injected into the economy and investors expect that to result in an inflated dollar. In other words the dollar will drop dramatically. The cost of all commodities will rise, and in turn everything will become more expensive. If you are holding gold, this is obviously a good thing, ad your insurance will pay off. In terms of the Dragon Portfolio allocation, it probably makes sense to stand pat, perhaps this inflation will run away and go hyperbolic. Keep the insurance on until the crisis is over.
In terms of our very first Advisor position, Gold Standard Ventures (GSV), I expect that it will do very well, and will become that much more attractive as a take-over candidate. I would be hesitant to sell or even take a Free Ride with Roy, unless it was acquired. Although, if Gold did break through, I would expect this investment to pay off, and would probably be visiting Roy for sure.
I think the odds are slight against this scenario, at least in the short-term.
So, what if Gold were to drop, a strong pullback, what would that imply? It would mean that the dollar is still king and the commodities will likely remain weak. It may also mean we are heading into a period of deflation. The great boogie man that Wall Street dreads. I believe this is an opportunity to load up on more gold, increase that insurance, bully up the Dragon Portfolio. It will probably mean also that volatility will drop, and so there’s the opportunity to pick up more Long Volatility positions. But we’ll talk about that in a separate alert should that be the case.
This would also setup a fantastic opportunity to start acquiring Gold Mining stocks. So, if this comes to pass, expect many alerts on undervalued junior miners, royals and streamers.
What Is Next?
I’m working on a more detailed analysis where I am monitoring the number of Gold miners that stay in operations versus those going off line. I will also be evaluating the situation with the US dollar and Swap Lines used as a weapon or strategic lever that will create more opportunities. See you then.
