Sexy Bottoms Appear in the Stock Market Too

Wednesday, 24 February 2021
Melbourne, Australia
By Callum Newman

[5 min read]

  • Eventually, you have to back your judgement and research
  • Do shares tank on rising yields? 

Dear Reader,

Did we just get a glimpse of something special in the last few days?

I’m talking about a potential bottom in the gold price and gold stocks!

It’s your guest editor Callum Newman again.

I wrote to you last Friday.

In that article we talked about how now is the time to be watching the gold sector.

Why? Aussie gold stocks are darn cheap…but the gold price has been under some pressure for the last few months.

That in turn plays out on the ASX.

Gold stocks tanked last Wednesday after a weak gold session in US trading the night before.

I watched the price action play out right in front of me.

Here’s what I saw…

Buying strength came in later that afternoon. Gold stocks began to hold a line after the initial drop on the day.

That was enough for me.

I pulled the trigger on a gold trade for my service Catalyst Trader.

I’ve been tracking this stock for more than a year.

Eventually, you have to back your judgement and research

I’m pumped for the potential upside on this one. 

All this sounds easy when you say it or write it.

But it takes courage to step into the market in that type of situation. I commend my subscribers who did it.

It’s too early to tell if the trade will be a success…but the first indication is positive.

The gold price stabilised that night in the US and Aussie gold stocks bounced the following day (Thursday).

Our resident rock kicker Shae Russell posted this on Twitter…

Port Phillip Publishing

Source: Twitter

[Click to open in a new window]

A ‘double bottom’ is a technical analysis term to describe the price action with the green line that you can see on the chart there.

The price retreats to the same level before heading higher again.

That’s the theory, anyway.

Of course, we can’t say for sure that the price of gold WILL head higher.

But today it’s still over US$1,800 (AU$2,282).

That’s a good sign.

We can only make decisions in the here and now.

That gold price is enough to give producing Aussie gold miners very good cash flows to go with their current low valuations (relative to the peak last year).

And if gold rises from here?

Then the gold stock party is potentially back in a big way. That’s part of what I’m angling for with my recent trade.

But it’s not dependant on a rising gold price. I trade catalysts.

These are company developments that can rerate the stock price regardless of the wider macro or market backdrop.

In the case of a miner, a big catalyst can come from reserve upgrades, a big exploration hit, or a takeover offer.

In the best trades you get more than one.

As I say, it’s early days yet for my gold trade.  

I’ll keep you posted on developments.

But the general advice stands: watch gold stocks!

But why the worry over the gold price in the first place?

That brings me to the big question right now… 

Do shares tank on rising yields?

The weakness in the gold price recently is directly related to the rising bond yields in the US.

Gold historically does best in a low ‘real’ interest rate environment.

Some go further and suggest that rising interest rates could hit the stock market in a big way too.

This fear is common. It flares up every other year. I’ve read the same thing multiple times in the last decade.

However, let me bring your attention to a chart I saw back in 2018. I’ve kept it aside in my home office ever since.

It compares US bond yields to the dividend yield on the US S&P 500 going back to 1950…

Port Phillip Publishing

Source: Financial Times

[Click to open in a new window]

Do you notice something?

Over the span of nearly 70 years, there is no consistent relationship between the two asset classes.

There are four separate scenarios that played out at different times.

How do we know which one is going to play out over the next 10 years?

The answer: we don’t.

But many people in the market today assume rising yields spell trouble for the stock market.

People in the 1950s believed the complete opposite!

Why am I telling you this?

Always take care when you see simple deductions and relationships trotted out as an excuse to sell your stocks and bunker down in cash.

The markets are never so simple.

It also distracts you from the most important factor that drives stock returns over time: earnings.

That’s why Warren Buffett says over time the market is a voting machine in the short term, but a weighing one in the long term.

And what is the outlook for Australian earnings?

Not too shabby, if you ask me. Take the natural resource sector.

Commodity prices are either high — iron ore, gold — or rising strongly to attack old levels — like copper, zinc, and lithium.

Think about this in the context of the wider financial system. Term deposit rates give you nothing. Bond yields are pathetic.

Why wouldn’t you be in the stock market?

Of course, there are risks. Shares are volatile. Companies are vulnerable to disruption.

But it’s possible to navigate this environment and build a sturdy portfolio of companies compounding their return at a high rate.

Sitting in cash is going to get you nowhere.

If you need a hand with that, your regular Insider editor Greg Canavan is relaunching his service to cater to this exact need.

How do you build a portfolio to protect and grow your wealth when interest rates are at zero and the financial system is increasingly divorced from day-to-day economic data?

Stay tuned — you’re about to find out.