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Finally Shining: Gold & Silver Rally Amid USD Strength

  • We are upgrading our view on gold given a positive turn in several technical indicators

  • A bearish macro backdrop persists, however, and gold’s long-term valuation is still not very compelling

  • Our Weekly Macro Themes report investigates interesting moves such as a rising US Dollar as precious metals rally


Investors were ready to write off precious metals in September and October. After all, what should have been the perfect environment for a rally in gold and silver (immense monetary and fiscal stimulus, rising inflation fears, and negative real interest rates) turned out to be a period of significant losses. Moreover, the opportunity cost of owning precious metals (and related mining stocks) was extreme from Q3 2020 through much of 2021.


Prices Turn Higher


Things changed at the end of last quarter. The silver ETF and gold miners staged impressive rallies while the S&P 500 surged in October. And now gold is perking up. These bullish moves went under the radar given the massive equity market climb. The Weekly Macro Themes report dives into the many intriguing moves taking place in gold, silver, gold miners, and the US Dollar.


We Turn Neutral from Bearish


For a variety of reasons, we have turned neutral on gold from a bearish view. There has been significant improvement in gold’s technical picture, and sentiment & positioning trends lean bullish. The major headwind is, of course, a tightening cycle from the Federal Reserve. Other central banks are charging ahead with rate hikes.


Investors Remain Underweight Relative to History


It’s possible that the bearish macro/policy backdrop was discounted into the price of gold. Investors were also lightly positioned to the yellow metal. Our featured chart illustrates just how bearish market participants were (and still are) to gold. Implied ETF allocations peaked a decade ago near 8%, but then collapsed to the 1-2.5% range for the better part of the past seven years.


Featured Chart: Implied ETF Allocations to Gold Are Skidding on All-Time Lows

chart of implied asset allocation to gold

Better Flows and Momentum


Gold’s recent jump is buttressed by a higher low in our ETF flow indicator. Moreover, the FX breadth indicator (which tracks the performance of gold versus a basket of currencies) says there is some momentum behind this past several weeks’ price action. Gold’s chart appears more bullish when priced in currencies other than the Greenback. Still, we await a more decided breakout before turning outright bullish.


Long-Term Valuations Still Lean Expensive


Another piece of evidence that makes us cautious is our gold valuation indicator which still reads as “expensive” despite a significant reset from 2020’s extreme level; gold’s composite long-term valuation Z-score is about 0.5 to the expensive side.


Higher Gold with A Higher Dollar?


What’s fascinating about the recent jump in precious metal prices is that it has transpired with a rising US Dollar Index. The DXY made an initial breakout last week. Conventional wisdom says a higher dollar is a negative for precious metals, but we find many examples where both gold and the USD have rallied in the past. The move often catches traders off-guard.


Gold Miners and Silver Also in Focus


Concerning gold miners, the Weekly Macro Themes report details an updated stance on the seemingly left-for-dead group of stocks. We also dig into what has been developing in the silver market.


Bottom line: Our view on gold has shifted from bearish to neutral given a plethora of macro factors, but mixed monetary signals and somewhat elevated gold valuations still suggest caution. At the same time, our bullish stance on gold miners initiated two months ago is reiterated.



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