What “Risk-Off” Means for Gold
Just when it looked like stocks might be rounding a corner, sellers have returned in force and pushed the major indexes into bear market territory. While this was bad for Wall Street, gold finally got some much-needed relief as “risk-off” is clearly back with a vengeance.
Last week, we discussed the “golden opportunity” for bullion in the wake of investors’ cratering confidence in the economic outlook. Gold was at first slow to respond to the rush to the exits in the equity market. But gold’s latest refusal to fall under the $1,800 an ounce level showed that hedging demand has replaced interest in bargain hunting for stocks.
It doesn’t hurt that gold’s currency component got a big boost when the dollar index pulled back sharply late last week. But at this point, gold seems to be moving independently of currency considerations as the desire to protect capital from raging inflation intensifies. So even if the dollar continues to strengthen, haven demand for the metal should continue to hold sway.
Another way of looking at gold’s strengthening position versus the stock market is to compare the gold front-month futures contract with the S&P 500 Index (SPX). This provides an excellent way to measure gold’s relative strength compared to the SPX, which is one of the ways that many institutional traders and fund managers consider whether gold is worth owning.
When we compared gold with the SPX, the following trend is revealed. The following chart illustrates better than the gold price by itself how much the metal is outperforming the equity market on a relative basis. It’s not uncommon for a powerful uptrend in gold’s relative performance versus the SPX to precede a significant move higher in the futures price.
Another key consideration for the gold outlook is the current strength of its sister metal silver. Although silver hasn’t exactly set the world on fire lately, it’s starting to look good from a relative strength standpoint. Here you can see the rally to multi-month highs in the silver versus SPX chart.
The strongest gold bull markets have historically happened when silver leads—or at least confirms—gold’s rallies. But by significantly outperforming the stock market, there’s a good chance silver will attract the attention of institutional traders (i.e., the ones who move the market) in the coming weeks and months.
One more comparison is worth mentioning. While it’s not commonly discussed by most analysts, gold’s relationship versus cryptocurrency is quite interesting. In the last few years that bitcoin and other crypto products have become established as a favorite speculative vehicle for the younger generation of market participants, an inverse relationship of sorts has developed between gold, bitcoin and the stock market.
This relationship between bitcoin and stocks was first observed by the well-known market technician, Tom McClellan, who has pointed out that whenever bitcoin prices rally, the S&P 500 normally follows its lead within a few weeks. He makes the case that bitcoin has become a leading indicator of sorts for the stock market (for some unknown reason). Confirming this observation, the S&P’s swoon starting in January was in fact preceded by a peak in bitcoin some six weeks earlier.
The assumption underlying the bitcoin/stock market connection is that cryptos are most heavily sought after when traders are in “risk-on” mode. But when they’re in “risk-off” frame of mind, bitcoin prices tend to slump. That’s where gold comes in, and it makes sense that when cryptos are out of favor gold should be coming back into favor. And that’s basically the conclusion that can be made in the following graph comparing gold’s performance versus the Grayscale Bitcoin Trust (GBTC), a leading bitcoin tracker.
All told, gold’s recent outperformance versus the major risk-oriented assets suggests better things lie ahead for the metal. Investors are increasingly worried over the global economic outlook, inflation and the Ukraine war, and it’s taking a toll on their collective psyche, convincing them to avoid taking on risk. With “risk-off” now the dominant theme, this is exactly the kind of atmosphere gold needs to shine.
Updates
Fluor (FLR) is a leading engineering firm, providing construction, maintenance and project management services for the oil and gas, industrial and infrastructure and power generation (including nuclear) industries. Participants bought a conservative position in FLR on May 31 using a level slightly under the 24.70 level (closing basis) as the initial stop loss. This level was violated on June 17, kicking us out of the position. SOLD
After the recent technical improvement in gold, participants recently purchased a conservative position in the GraniteShares Gold Trust (BAR). BAR is my gold tracker of choice when gold prices are on the rise (due to its attractive per-share price), and I’m expecting increasing recession worries among investors to bolster gold’s demand profile. I suggest using a level slightly under 17.94 (the May 13 bottom) as the initial stop-loss on a closing basis. While the 17.94 level was violated by two cents last week, it didn’t quite qualify as a sell signal, and so I recommend that we stick with this position. BUY A HALF
Kronos Worldwide (KRO) is a leader in the production of titanium dioxide pigments, the world’s primary pigment for providing whiteness, brightness and opacity (used in two-thirds of all pigments). In Q1, the company reported another solid, consensus-beating quarter. Revenue of $563 million was 21% higher from a year ago, while per-share earnings of 50 cents beat estimates by 23 cents, driven by higher titanium dioxide prices. Titanium dioxide segment profit was a whopping 129% higher, due to higher selling prices and higher sales volumes. Going forward, analysts see sales rising 9% and earnings soaring 23% for 2022, which will likely prove conservative. Kronos also declared a 16-cent dividend (4% yield), in line with the previous one. Meanwhile, Deutsche Bank just raised its price target on the stock from $18 to $20. On May 19, I advised traders to take 50% profit in KRO after its 18% rally from our initial entry point. I also recommend raising the stop-loss on the remaining position to slightly under 17 (closing basis). HOLD A HALF
Sociedad Química y Minera de Chile (SQM) is a Chilean supplier of fertilizers, iodine, lithium and industrial chemicals. It’s also the world’s fourth-largest lithium producer by market cap and holds a 19% share of the global market for lithium and lithium derivatives. Lithium supply was unable to keep pace with demand in 2021, a trend that SQM’s management expects to continue this year. Additionally, the company is in the midst of a capacity expansion (up to 180,000 tons, and with plans to spend $900,000 this year) which SQM believes will allow it to increase its market share in 2022. SQM posted a stellar 12-times increase in net income for Q1 on the back of strong revenue thanks to higher lithium prices. The results pushed SQM to a string of new highs in late May, prompting us to book some profit in our trading position in this stock. I now recommend that traders raise the stop-loss to slightly under 87.15 (closing basis) where the 50-day line comes into play. HOLD A HALF
Portfolio
| Stock | Price Bought | Date Bought | Price on 6/17/22 | Profit | Rating |
| Fluor Corp. (FLR) | 27.2 | 5/31/22 | 24.25 | -11% | Sold |
| GraniteShares Gold Trust (BAR) | 18.35 | 6/7/22 | 18.25 | 0% | Buy a Half |
| Kronos Worldwide (KRO) | 15.25 | 4/12/22 | 18 | 18% | Hold a Half |
| Sociedad Química y Minera (SQM) | 83.5 | 5/17/22 | 90.3 | 8% | Hold a Half |
Buy means purchase a position at or around current prices.
Buy a Quarter/Half means allocate less of your portfolio to a position than you normally would (due to risk factors).
Hold means maintain existing position; don’t add to it by buying more, but don’t sell.
Sell means to liquidate the entire (or remaining) position.
Sell a Quarter/Half means take partial profits, either 25% or 50%.