It’s been a rough month thus far for the precious metals complex, with the price of gold (GLD) plunging by more than 7% thus far in June despite one of the highest inflation readings we’ve seen in more than a decade.
While many investors had hoped that a continued dovish stance by the Federal Reserve in last week’s meeting would light a fire under the metals, investors were hit with a nasty downside reversal instead, despite only a slight change in rate-hike expectations.
The good news is that this pullback has pulled sentiment on gold back near its buy zone with a reading of 21% bulls, and the correction has done no long-term technical damage, even if short-term momentum has flipped to the downside. This suggests that this correction could provide a buying opportunity if weakness persists. Therefore, this is likely a good spot to begin accumulating the best miners like Kirkland Lake Gold (KL). Let’s take a closer look below:
While the correction during the past six trading days has not been enjoyable for investors, the one silver lining is that it has put a massive dent in sentiment, with bullish sentiment sinking from 65% bulls to 20% bulls in the course of barely two weeks. We have not yet hit a buy signal for this indicator that would suggest a significant bullish tilt to the reward/risk picture for the bulls, but we are getting closer, and this correction is helping to pull down the long-term sentiment moving average. For now, we remain in the neutral zone for this sentiment indicator, but if this correction does continue and we re-test the $1,740/oz level, it’s possible we could see gold head back onto a short-term buy signal from a sentiment standpoint.
(Source: Daily Sentiment Index Data, Author’s Chart)
Many investors have pointed out that the charts are broken for gold after last week’s takedown, but gold is still hanging on by a thread to its multi-year breakout level if we look at the bigger picture. This level comes in at $1,765/oz, with bigger support near $1,750/oz for the metal. While it would be preferable if the metal found support at current levels and began an advance, a pullback to the $1,730/oz level or lower would not be the end of the world. The key, however, is that we don’t see a monthly close below $1,740/oz, which would increase the probability that we have to re-test the February low near $1,670/oz.
If we look at the daily chart, gold’s momentum is lower for the time being, but we can see that the metal is sitting right near multi-year support, an area where we could see a bear trap if weakness continues. However, as noted above, the key will be defending $1,740/oz on a monthly close, as a monthly close below this level would constitute a break of the upper support area. So, while the current pullback has not done any damage, we do want to see the bulls begin playing defense soon, or $1,670/oz could be in the cards.
So, what’s the best course of action?
While the price of gold can be finicky and hard to predict, some names continue to trade at very compelling valuations, like Kirkland Lake Gold. The company currently trades at less than 11x FY2022 annual EPS estimates of $3.60 despite having industry-leading all-in sustaining cost margins above 55%.
It’s important to note that the company could report annual EPS of more than $3.90 if gold were to head above $1,950/oz next year, and the company also has the best balance sheet among its peers, set to finish FY2021 with more than $1.3BB in net cash. Armed with a buyback program with the ability to buy back 9% of outstanding shares, two large mines that are ramping up production, and a 2.00% dividend yield at current prices, the stock looks like a steal at current levels.
So, while I see gold as a hold here until we see if the metal holds onto $1,740 – $1,750/oz support, KL looks like a Strong Buy below $38.00 for investors willing to take a long-term view. As long as the $1,740/oz – $1,750/oz level holds, I continue to see the potential for gold to head above $2,000/oz this year and see no reason to entertain a re-test of break of the February low at $1,670/oz.
Disclosure: I am long GLD, KL
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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