GLD ETF: Buy The Impending Shakeout In Gold

There’s been a lot of noise around gold and mining stocks over the last 6 weeks or so. If I may ask, why? Gold (NYSEARCA:GLD) hasn’t had a single up day of 3% since early November and the leading gold mining ETF (GDX) trades at levels far below where it traded in 2006-7, when the gold price was around $500 per ounce.

I get it, the noise is based on recent outperformance. Still, gold has been more steady than stampeding since the onset of the COVID pandemic, and anyone who bought equities in the precious metals sector at the 2020 lows has still underperformed the S&P 500 (SPY).

Breakouts in the precious metals sector, as many of us witnessed in 2010-11, are not only louder than recent action, they are violent. The complacency inducing tip-toeing-up-the-stairs action in precious metals is bullish in nature, but it is not how the yellow metal will make all-time highs later this year.

As the charts above show, GLD traded very similarly from early October through November of 2009 as it did in the 10 weeks through mid-January 2023. Pullbacks are almost non-existent and there is a climactic break above the uptrend channel at the top, just as investors become convinced that gold cannot see significant weakness given the macro environment at the time. Mind you, gold is no rookie out there simply strutting its stuff, it is a crafty veteran with countless tricks up its sleeves. The volatility that followed the 2009 rally shook out week hands, leaving most investors on the sidelines for much larger gains that followed.

After consolidating for the first half of 2010, GLD continued upward through mid-October in another period of tip-toeing-up-the-stairs, before another extremely volatile 4 month consolidation period. From February 2011 through mid-2013, GLD entered and eventually exited bubble mode, shown below, and the yellow metal didn’t bottom till the start of 2016.

It is extremely important to note that gold continued to make all-time highs from 2010-11 with the US Dollar gaining versus all major currencies, and much more so against minor ones. Gold’s latest rally has taken place amidst USD weakness, which I’ve argued in recent writing will continue and accelerate. In most currencies, gold made a new high in 2020. Similarly, USD weakness going forward will make the long term upward trajectory of gold more pronounced in the leading (for now) world reserve currency.

There will be a real breakout, but first a definitive shakeout. I fully expect $100+ per ounce up days for the yellow metal in 2023, as well as $100+ down days. GDX, similarly, can do 10% either direction in no time flat.

The impending shakeout in the precious metals sector will see the faint of heart run for the hills, never to return. Their “momentum play” in a sector new to them, but in fact older and wiser than any investor or trader, will have “broken” on a single down day that wipes out weeks of gains.

In the immediate term I am “fearful while others are greedy,” but expect vice versa very soon. While gold and mining stocks may have more than a day or two of punishment in store for them, the rebound will be even more fierce and leave those who abandoned ship bewildered and far behind.

I’m not on the sidelines waiting for a better entry in the precious metals sector, but I am avoiding leverage at the moment, unlike November and early December of 2022. Similarly, investors should have dry powder ready to add to existing positions on the rapidly approaching discount.