Brian Chu: gold stock punters should welcome a gold correction

The following is an excerpt from our gold expert Brian Chu's latest piece for The Insider. Gold moved from US$1,600 an ounce or so to over US$2,000 over the last eight months as the US long-term real yield eased from 2% to 1.5%. Source: Refinitiv A rising price of gold has helped bring buying interest back into gold stocks, leading to two good rallies already — the first one occurring from late-September 2022 till this January, and the other starting in mid-March. But recently, there’re signs that suggest that gold stocks might’ve moved ahead of themselves and are bracing for a correction. It also seems that my colleagues are sharing this sentiment. And yet, as Fat Tail’s resident gold bull, I’m not at all worried. Let me show you what I’m seeing, to help explain... A correction amidst a gold bull market Most of us know nothing rises in a straight line. And those that do fall harder when the momentum runs out. If you look at the figure below showing the performance of the ASX Gold Index [ASX:XGD], you’ll see that since last September, we’ve had two rallies: Source: Refinitiv The correction during February looked like a healthy consolidation, in retrospect. It may have interrupted the bullish setup, as the three moving-average trendlines had all turned positive just before the selloff occurred. However, the index had rallied some 60% from its lows, which is a solid recovery. The consolidation during February brought down the ASX Gold Index by some 15%, but that set a good base for the second rally that we saw recently. And you can see that the bullish setup is in once again. Let’s take a closer look at the index relative to the 50-day and 200-day moving averages since mid-April when we hit a recent high of 7,813. There’s a wide gap between the index and these two trendlines. This is one reason why I think prices are over-stretched in the short-term. Secondly, you would’ve noticed that leading gold producers such as Anglogold Ashanti [ASX:AGG], Newcrest Mining [ASX:NCM], Northern Star Resources [ASX:NST], Perseus Mining [ASX:PRU] and Evolution Mining [ASX:EVN] hitting some resistance. Many of these producers are trading at record highs but are unable to break through it. Simultaneously, you might’ve also noticed that many of the smaller producers are lagging. Several of these are solid performers such as Ramelius Resources [ASX:RMS], Regis Resources [ASX:RRL], Silver Lake Resources [ASX:SLR] and West African Resources [ASX:WAF]. They may be trading at 52-week highs, but the prices are at least 30% lower than their all-time highs. As you go further down the hierarchy and look at the explorers, many are trading at rock bottom prices. Some are even making new lows in the past fortnight. Source: Refinitiv This is because the rally in gold didn’t bring investors interest into this space. It still feels like a nuclear winter, at least to mainstream investors. Thus far, the bull market in gold has benefited the larger players in the gold mining space, but not much (if any) for the small players. This happens in the early stages of a bull market. As it continues, the momentum picks up and the rest of the market catches up.

By Kiryll Prakapenka

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Brian Chu: gold stock punters should welcome a gold correction

By Kiryll Prakapenka

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