Gold Soars in August to Best S&P 500 YTD

Gold Climbs 18.55% YTD as Trade War Worsens

August was notably eventful for gold bullion. Gold added $110 in August to close the month at $1,524, gaining 7.8%. YTD gold is  up 18.55%, ahead of the S&P 500 Index's rise of 15.34%. Gold equities have impressed even more, climbing 46.4% YTD as measured by Sprott Gold Miners ETF (SGDM).

Month of August 2019

Indicator 8/31/19 7/31/19 Change % Chg Analysis
Gold Bullion $1,524 $1,414 $109.79 7.8% Next Resistance at $1,580
Silver Bullion $18.36 $16.26 $2.10 12.9% Another solid month, target $20
Gold Equities (SGDM)1 $25.66 $23.00 $2.66 11.56% Strong advance for the month
DXY US Dollar Index2 98.81 98.52 0.29 0.30% Steady up trend
U.S. Treasury 10 YR Yield 1.50% 2.01% (0.51)% (25.5)% Very sharp drop, 1.36% target
German Bund 10 YR Yield (0.70)% (0.44)% (0.26)% (59.09)% New lows, target -1.00%.
U.S. 10 YR Real Yield (0.04)% 0.26% (0.31)% (119.23)% Real yield now negative
Total Negative Debt ($Trillion) $17.0 $14.12 $2.92 20.7% Tracking model, target $19 trillion
CFTC Gold Non-Comm Net Position3 and ETFs (Millions of Oz) 115.0 103.6 11.40 11.0% Another large increase in gold holdings, all-time high

Gold mining equities rose 11.6% in August, while broad equity markets fell 1.8% as the U.S.-China trade war escalated further, and signs of recession increased. To recap, at the July 31 FOMC (Federal Open Market Committee) meeting, the Fed cut interests rates (25 basis points) for the first time since 2008. One day later, President Trump announced a levy of 10% on an additional $300 billion of Chinese imports into the U.S. The Yuan was allowed to be devalued past the critical 7.00 USD/CNY (one U.S. Dollar equals 7.00 Chinese Yuan) level immediately by China. In turn, the U.S. declared China a currency manipulator pushing the trade war into a more dangerous phase. The impact was immediate as bond yields plunged and equity markets and commodities sold off sharply. Gold, however, broke past the $1,450 resistance level and traded up $25 to close at $1,458 that day.

Gold continued to rally throughout August as the market began to price in the negative consequences of a worsening trade war and a weaker Yuan. Shortly after, U.S. 2-year and 10-year yield curve inverted thus signaling the possibility of a recession coming to the U.S. Later in the month, China announced a $75 billion tariff on U.S. oil, soybeans, cars and other goods. The U.S. responded that the 25% tariff on $250 billion worth of Chinese previously-specified goods would increase to 30% and the 10% tariffs on the remaining $300 billion would rise to 15%. The market’s reaction was predictable: A continuation of the early August equity swoon and stronger support for gold.

Gold Quietly Outperforms Major Asset Classes

With gold climbing to $1,524 at the end of August, we see $1,580 as the first meaningful resistance level from here. By all measures that we track, gold bullion is advancing in a very bullish manner. Like recent prior months, the accumulation of gold continues, yields are all lower and more tail risks are emerging as we will discuss further. U.S. 10-year yield has fallen below our 1.60% technical target without a pause. The 1.36% low of 2016 is now the likely target, but given the strength of this move, we would not be surprised it fell below this level as well. There are many forces at play and more being added.

Figure 1. Gold Bullion versus U.S. Equities/Treasuries

Source: Bloomberg as of September 1, 2019.

In Figure 1 above, we highlight that gold relative to the SPY ETF is breaking out of a multi-year down channel. Gold relative to TLT ETF has quietly been in an up-channel since 2016. Against these two main asset classes (U.S. equities and U.S. Treasuries), gold looks to begin another relative outperformance upcycle. In the past, this outperformance can be significant under the right conditions. We look at gold bullion versus the TLT ETF (+20 year U.S. Treasuries ETF). The long end of the bond market is the best performing part of the bond market. Even measured against the long bond market, which is having one of its most robust performance runs, gold has been quietly outperforming since 2016. The U.S. equity market (SPY ETF/S&P 500) is by far the best-performing equity index globally. After several years of underperforming in a well-defined down channel, gold versus SPY is now breaking to the upside of this channel. Note that in the prior gold upcycle, gold significantly outperformed bonds and equities. (And, yes, massive underperformance followed.)

Recent memory and the adverse bias effects of considerable losses are the last significant obstacles to gold sentiment remaining.

Gold Equities: To the Top of Quant Screens

The average price of gold price year to date as of May 31 was $1,296. The average monthly price of gold for June, July and August were $1,362, $1,426, and $1,503, respectively, representing significant month-over-month advances. The average price of gold in August versus the first five months of 2019 is up +16%. Gold companies in general terms have a fixed cost structure (unless there are dramatic changes to their production profiles) and are mostly unhedged. When September rolls around and analysts are back from the holidays, we should see dramatic revision increases in gold companies' earnings figures. Quant funds are dominating the equity markets.

One of the primary quant drivers is EPS (earnings per share) revision and momentum. Given the sharp move in bullion prices, gold companies will begin to rank at the very top of quant screens. During a strong up move in gold prices, gold equities' earnings estimates consistently see upward revisions as analysts' price decks for modeling, typically lag gold futures prices. This continuous upward revision is another key screen for quant funds. Also, as the economy slows, broad market earnings will begin to roll over. Downward revisions are already dominating for one year forward consensus estimates. Lower interest rates usually boost P/E multiples but not when growth is slowing; and systemic market risk is rising as we discuss further.

Gold equities will be one of the few groups with significant positive earnings revisions, while the majority of companies will see downward earnings revisions.

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