The analysis system from OptionEarner.com for precious metal stocks has recently improved significantly, returning clearly to the buy zone with a value of 1.18, up from a previous 0.97. According to the indicator’s methodology, a value above 1.0 is considered a strong buy signal; historically, extreme points have been in the range of approximately 1.5 to 1.6. While this does not yet represent an extreme buy signal, it does indicate a clear brightening of the outlook after a long period.
Analysis System Jumps Back to Buy
Is the gold price now facing a rebound, or will it drop even further? No one can reliably predict that at this moment. Today’s drastic slump could well herald the final sell-out. However, it could just as easily be another stage in a downward movement characterized by nervous sentiment and liquidity constraints.
For this very reason, it seems to make little sense to speculate on the exact turning point. It is more advisable to enter the market in stages and simultaneously take advantage of the currently extremely high volatility by selling covered puts on selected, fundamentally interesting assets. The currently very high premiums provide an additional buffer should prices decline further in the short term.
Why is Gold Falling Despite the Geopolitical Crisis?
At first glance, it seems contradictory that the gold price is falling so significantly during a severe geopolitical crisis. However, in acute liquidity crises, selling often occurs where the largest gains have previously accumulated and where liquidity can be obtained quickly. This was exactly the case with gold and many precious metal stocks recently.
In addition, the precious metals sector was previously technically heavily overbought. Many institutional investors had already included gold in their portfolios as a safety component and alternative asset. In a tense market phase, such positions are then frequently liquidated, even though the long-term fundamental data may have changed very little initially.
Adding to the pressure is the fact that hopes for imminent interest rate cuts are being dampened for the time being. Should inflation pick up again in the wake of the current crisis, even further interest rate hikes could not be completely ruled out. This represents a short-term headwind for gold and mining stocks.
Fundamentally, Many Arguments Remain Intact
Despite the ongoing correction, in our view, several weighty arguments remain that support a resumption of the precious metals and commodities bull market.
The escalating national deficits are likely to be further exacerbated by the current crisis, putting additional strain on confidence in fiat currencies. At the same time, central banks have limited room to put even more pressure on the already struggling economy through significantly higher interest rates. Thus, the scenario of negative real interest rates remains realistic in the medium term.
Furthermore, the global struggle for strategic raw materials is by no means over, only interrupted. Oil, rare earths, silver, copper, etc., will continue to play a central role geopolitically. The insufficient investment in new deposits and production capacities over recent years also remains a factor. They are merely fading into the background temporarily during the current crisis.
Our Conclusion for Investors
In our view, there is much to be said for proceeding calmly, with discipline, and anticyclically in this market phase. Those wishing to invest should do so in stages rather than with a single lump-sum position. At the same time, the high implied volatility opens up attractive opportunities to collect high premiums via covered put sales on selected underlyings, thereby building an additional safety buffer.
No one can predict the exact turning point with certainty. But it is precisely in such phases that the most interesting anticyclical opportunities often arise.
Eckart Keil, OptionEarner.com
