New Gold Record High
Gold has been rallying in the background for a few months, but no one paid much attention to it because the Nasdaq has been on a historic run. It took a new record high being hit for gold to get credit for its rally. There have been so many once in a decade/once in a century events this year, why not add gold hitting a record high to this list? Gold surpassed its 2011 record high. As it is nearing 2,000. Every gold mining stock in the GDX ETF is above its 50 and 200 day moving average.
As you can see from the chart below, 75% of the stocks in the GDX are at a new high. Only other time that happened as in 2016. It didn’t even happen in 2011. This spike in new highs has occurred because of the speed of gold’s rally. It reminds of the rally in the Nasdaq. Many gold bulls believe gold stocks aren’t high enough for how well gold has done. That’s probably because the market doesn’t believe gold won’t stay this high.
This is exactly like how oil stocks didn’t crash when oil went negative. Everyone knew that was a broken market. Those oil stocks were already very low. It ended up being a good buying opportunity for energy stocks. The GDX index is up 131% since the March bottom which is actually better than the CLOU cloud ETF which is up 75%.
Gold Up Because Of Low Real Yields
GLD is up 7 days in a row in which it gained 8%. It’s up 32% from the March bottom. It fell in March because of liquidity. Gold is commonly thought of as a safe haven asset, but it didn’t provide much comfort in March. GLD is like every other financial asset. The reality is gold is only safe over the long term. It will always be worth something. It will outperform cash which loses value every year, but that’s not much of a performance.
We can expect it to underperform most productive assets over the next few decades. It’s hard to justify buying gold over a business that spews out cash and pays investors a dividend. Gold has a zero percent yield and only goes up if more people speculate on it. You need to be extremely negative on the long term to believe gold will be one of the best performing assets.
Gold and silver have done well because the real yield hit a record low. Inflation is starting to perk up, but it’s not driving nominal rates higher. It seems as though there is unlimited money chasing any semblance of yield it can find. Gold investors typically think of gold as an inflation hedge because it maintains some sort of value in the long term, but the reality is it is more driven by real yields.
Silver Up Too: Insane Speculation
SLV silver ETF rose 25% in 6 days which is the greatest spike since September 2008. Its recent rise has been quicker than gold as speculators are buying based on its low price in relation to gold. Typically, it is the more volatile precious metal. Silver has more actual use cases than gold which is thought of as an investment or used for jewelry.
Silver is an industrial metal. The chart below shows silver is up 32.7% in the past month which is the strongest performance since the Hunt brothers tried to corner the market in the early 1980s.
Speculation has gotten insane. It shows up in the options market. Short interest in the GLD gold ETF is close to the lowest level since July 2009. GLD call option volume posted its 2nd biggest weekly jump ever last week. Record was in early 2016. Dollar index is at its lowest level in 2 years as it’s down 3.93% in the past month.
Gold likes low real yields. The decline in the dollar doesn’t hurt when you look at it priced in dollars though. Call volume in silver hit a record high last week. It even was higher than the speculative bubble in 2011. It seems like every single asset is reaching bubble levels together.
Everything Up But Value Stocks
You have treasuries, tech stocks, and precious metals all exploding at once. We even have a heated housing market, but that’s not in a bubble. GLD, SLV, and IAU (gold trust) all made the top 5 for weekly flows last week. GLD and IAU are in the year to date top 10 as this rally has moved into its mania stage.
As of June 30th, the Nasdaq 100 outperformed the Russell 3000 broad market index for 9 straight months for the 2nd time ever. The other time ended in February 2000 which was right before the 1990s tech bubble burst. Nasdaq/NYSE volume is high and market breadth is low.
This growth/precious metals/treasuries rally is near its end. Only asset that’s not overheated besides the dollar, some emerging market assets, and small caps, is value stocks. Even the materials sector has done well recently as it has been the best performing sector in the past 3 months.
The chart above shows when certain trades are too crowded. Current warning is to avoid growth stocks. It’s a good time to buy value stocks based on JP Morgan’s crowding indicator. Let’s be honest. We didn’t need an indicator to know stocks like Tesla and Shopify are overcrowded. Retail traders are in this market like many have never seen before if we weren't investing or following markets in the late 1990s.
Conclusion
Gold is experiencing the same type of euphoria tech stocks have this summer as low real yields are powering insane moves in the market. Various assets are going so insane, it has become the norm. It makes you wonder if another asset can explode in value without any of the others losing steam.
If the value stocks rise and treasuries sell off, gold and tech stocks will likely fall. This has been an unusual market though as this is the first time since 1979 gold and the S&P 500 hit a record high in the same year.