Gold Is At A Crossroads -- Here's What You Need To Know...

Dave Forest's picture

Friday, July 8, 2016 - 10:30am

by Dave Forest

It's been an exciting couple of weeks. 

As recently discussed, the resources world turned topsy-turvy in the wake of the "leave" vote in the U.K. Brexit referendum. Gold soared (and gold stocks too), and almost everything else tanked. 

And since then, the situation has grown all the more interesting. 

All indications are that the initial panic over the Brexit vote was largely overdone. The Dow Jones Industrial Average has recovered about 80% of the losses it suffered in the two-day panic following the Brexit news. 

That rebound has extended to most of the commodities sector. This is a development I thought we'd see. Investments like oil and copper have overcome investor fears and are staging a strong bounce off post-Brexit lows. 

Copper, for example, had plunged as low as $2.07 per pound on the morning of June 24. But the metal has stormed back more than 7% since then, currently trading at $2.22 per pound as I write. 

Copper is now trading at its highest level in nearly two months

That's a strong sign that fears about lost demand in the face of the Brexit vote were overdone. And it makes sense, given that the actual process of the U.K. leaving the European Union is forecast to take years to actually pull off -- meaning it's highly unlikely we'll see any near-term economic effects on a scale that would reduce global copper demand. 

Share prices of copper mining and development stocks I own in my premium newsletter, Scarcity & Real Wealth, have also seen a nice bounce from the strength in copper metal. 

At the same time, oil prices have been staging an equally strong comeback. West Texas Intermediate crude gained 4.2% in a single day on June 29, to once again approach $50. Today, a barrel is going for $47.60. 

That pretty much recoups the entirety of the losses wrought after the Brexit vote. And oil stocks have responded to that recovery in a big way -- as the chart below shows, sector indices like the S&P/TSX Capped Energy Index have gained 5.7% since bottoming on June 27.

The S&P/TSX Capped Energy Index has rebounded strongly since falling in the wake of the Brexit vote

In fact, the index is pretty much back to where it was before Brexit -- just like oil prices themselves. And that's been good news for my oil holdings as well. 

Overall, I stand by my original assertion -- there's no need to change any of the quality names we own in Scarcity & Real Wealth in light of the happenings in Europe. Although when it comes to another sector -- the gold business -- there's reason to believe that Brexit has set in motion some major shifts. 

Brexit Is Continuing To Propel Gold To New Highs
As I discussed previously, gold was perhaps the biggest winner in the investment world in the wake of the Brexit vote. The resulting financial uncertainty propelled the metal well above the critical $1,300 per ounce mark. 

In the week following Brexit, that strength in gold has continued. Bullion closed out trading last Friday near $1,342 per ounce, topping the highs we saw immediately after the Brexit vote news. 

That increasingly makes it appear that -- absent any disruptive events -- gold will hold the psychologically important $1,300 per ounce threshold. That's important for setting up the next move higher. 

Such a next leg up already appears to be in motion for the gold stocks. Share prices of many gold companies staged another strong move upward on Friday -- in parallel with the $20 surge in the gold price that day. 

Newmont Mining (NYSE: NEM), for example, was up 3.1% Friday. That capped a three-day surge that saw the stock gain 8.5% late last week, to close at $40.34 -- the highest level Newmont has enjoyed since early 2013. 

As the chart below shows, this looks like a definite breakout.

Newmont Mining gained 8.5% in the three trading sessions between June 29 and July 1.

A number of my other gold holdings have had strong days -- in fact, one even touched a near two-year high on June 29. 

Overall, I've been looking for the S&P/TSX Global Gold Index to hold the 220 mark, which has been a key resistance point over the last three years. And it looks as if the latest surge has locked the index above that level. As the chart below shows, last week's breakout took this indicator to a close of over 252.

The S&P/TSX Global Gold Index appears to have broken above the key resistance point of 220. 

All of those developments look supportive for another move up in gold and gold mining stocks. 

But...

I'm a little hesitant on upping exposure here because of a few subtle, but important, indicators flashing on my screens right now. 

One of the critical ones is the U.S. dollar. The dollar has been moving up in value the past week at the same time as the gold price was gaining. 

As the chart below shows, the dollar jumped as much as 3.2% against a basket of global currencies after the Brexit vote on June 24, showing strength in tandem with the gold price. 

The U.S. Dollar Index surged after the Brexit vote

That's an unusual situation. The dollar and gold historically have a strong inverse correlation. In fact, one of the only times in recent memory when the pair moved up together was during the months leading up to the 2008 financial crash -- when they both showed considerable strength. 

When the crash set in, gold and gold stocks both plunged (for a short time anyway, before staging an incredible run between 2009 and 2011). I can't help but mentally overlay that pattern on the trading action of today. 

All of this makes me glad I've been steadily taking profits on some of my gold positions. I may look to do the same with some or all of my current positions over the coming weeks. 

I haven't made any decisions yet. But it's worth noting that a stock like Newmont has surged close to my price target of $41. I'll be watching closely over the next several trading days to see if these large and sudden gains should be locked in. 

Gold appears to be at a crossroads, and I'll be sure to notify my Scarcity & Real Wealth readers of any action I take over the coming week or two. If you're invested in the gold sector, keep an eye out -- things could move quickly. 

​P.S. We've mentioned before that we've been bullish on gold for some time. But as I said before, we're at a crossroads right now. To help you prepare for the possible next leg up in gold prices, we're offering two free premium reports to anyone who is interested in joining me at Scarcity & Real Wealth. To learn how to get your hands on them at absolutely no additional cost to you, simply follow this link.

Dave Forest does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.