If gold reaches more than US$1,377.50 per ounce, seasonal analyst Don Vialoux says: “Every analyst on the street is going to be yelling: ‘We’re finally reaching the next secular cycle for gold!’” How should you take advantage of the coming gold and gold stocks’ season in the sun?
The sun is shining hot, long and bright lately (for the most part) and for analyst Don Vialoux, it signals the imminent rise of a different kind of golden age.
“Gold and gold stocks are lining up for an interesting seasonal trade this summer,” says the seasonality-focused analyst. Both have historically moved higher between late July and mid-October. “The key is not to get married to them. You want to play them just during their periods of seasonal strength.”
Based in the Greater Toronto Area, Mr. Vialoux co-founded popular investing-related websites timingthemarket.ca and equityclock.com with his son and fellow analyst, Jon. Speaking with Investor’s Digest of Canada last winter, the elder Mr. Vialoux had highlighted base metals and companies that mine them as the trade of the moment.
Since then, the circumstances have turned in favour of precious metals, especially gold. In fact, it and its miners, as measured by the S&P/TSX Global Gold Index (CAD), have outperformed both the TSX Composite Index and the S&P 500 since mid-February, shortly after the last market correction.
“This particular index has been on a long-term downward trend (for the last five years),” the analyst explains. “When the market reached a low, that was also a low for gold and the gold stocks.
“It (the index) actually bottomed (at about $178) back at the beginning of February and it’s been slowly but surely moving higher,” he said.
Gold stocks outperforming gold
Mr. Vialoux points out that when gold stocks do better than the metal itself, that is often a leading indicator that both will climb in price during the seasonally strong period.
“We’ve seen gold stocks nicely outperform the price of gold over the last few months.”
Some individual gold stocks outperforming both the gold index and the general market are Agnico Eagle Mines Ltd. (TSX—AEM; NYSE—AEM), Goldcorp Inc. (TSX—G; NYSE—GG), and Wheaton Precious Metals Corp. (TSX—WPM; NYSE—WPM). Agnico Eagle and Goldcorp were at their highest prices in about a quarter in early June, while Wheaton broke through a one-year high then as well.
(The other period of seasonal strength for precious metals is from the beginning of December to the beginning of February. True to history, the gold index was sitting at about $205 at its most recent peak, at the end of last January.)
Based on his technical analysis, a move in the index above $193.52 will prolong the trend. Meanwhile, gold producers such as Barrick Gold Corp. (TSX—ABX; NYSE—ABX) and Franco-Nevada Corp. (TSX—FNV; NYSE—FNV) have not yet surpassed their recent highs but are nevertheless also worth watching, says Mr. Vialoux.
Asked what he attributes the recent preference for gold stocks over gold to, the analyst replies: “It’s more market sentiment than anything else.” When there is a perception that the factors that push up the price of gold are occurring, investors are historically more likely to buy into miners over bullion.
Inflationary pressure pushing up price of gold
Those factors include inflationary pressure increasing in Canada and the United States. The central banks of both countries have indicated they will raise interest rates.
Political uncertainty because of the US mid-term elections and any trade disputes would lead investors to gold as well, Mr. Vialoux suggests. Usually when the US dollar is higher, gold is lower, but this has not been the case for the last four months, he adds. Assuming that the US dollar stays flat or goes lower, this neatly sets up gold’s period of seasonal strength.
Based on gold prices year-over-year, when gold stocks begin reporting 2018 second-quarter numbers in late July, they should, like first-quarter results, be better than those of 2017, adding more fuel to the fire.
Investors can buy any of the individual stocks mentioned above if they want to take advantage of the gold trend, but Mr. Vialoux recommends picking a gold exchange traded fund (ETF) to reduce volatility. His ‘best buy’ recommendations, the iShares S&P/TSX Global Gold Index ETF (TSX—XGD) and BMO Equal Weight Global Gold Index ETF (TSX—ZGD), both closely track the S&P/TSX Global Gold Index, although the iShares fund weights its holdings by market capitalization rather than equally.
According to the analyst, gold priced in US dollars is forming a base to break past its five-year average level, a “reverse head-and-shoulders” movement. If it reaches more than US$1,377.50 per ounce, Mr. Vialoux says, “Every analyst on the street is going to be yelling: ‘We’re finally reaching the next secular cycle for gold!’”
This is an edited version of an article that was originally published for subscribers in the June 22, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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