The Stock Market Is Just A Sideshow, The Real Gains Are In Gold – Seeking Alpha

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Since August 2011, the three major U.S. stock indices have produced substantial returns. There was a bit of a lull in late 2015/early 2016, but over the last 5+ years, the Dow, S&P 500, and Nasdaq have been on a tear.

^DJI Chart

^DJI data by YCharts

The run actually started at the 2009 lows of the financial crisis. If you begin from March of that year, you can more than double the performances shown above – as the Nasdaq is up over 360% since March 9, 2009, while the Dow and S&P have tacked on gains of over 200%.

I’m focusing though on August 2011 as that is when the precious metals sector peaked and entered a major bear market. Since then the SPDR Gold Trust ETF (NYSEARCA:GLD), the iShares Silver Trust ETF (NYSEARCA:SLV), and the HUI (or NYSE Arca Gold Bugs Index) have declined precipitously.

GLD Chart

GLD data by YCharts

However, while investors continue to chase the stock market higher (albeit maybe not for much longer), the precious metals sector has quietly generated very strong returns over the last 15 months and is producing far greater gains than the major U.S. indices.

The reason?

The bear market in gold ended in late 2015, and it’s no coincidence that its bottom coincided with the first Fed rate hike in over 9 years (more on that below). But not many investors seem to realize – or believe – that a new gold bull market has emerged. This sector continues to climb the proverbial wall of worry.

Since the beginning of 2016, GLD and SLV are up 20.74% and 32.90%, respectively. Gold and silver stocks in particular have been the place to be, as the HUI is up over 91% during that time.

GLD Chart

GLD data by YCharts

The Dow, S&P, and Nasdaq are all up as well, but their gains still trail physical gold and silver, and are lagging well behind the HUI.

^DJI Chart

^DJI data by YCharts

It’s the same story year-to-date, as since the start of 2017, this stealth bull market in precious metals has continued.

GLD Chart

GLD data by YCharts

While the Nasdaq has been strong, its percentage increase since the beginning of the year remains well behind the percent rise in the precious metal space.

^DJI Chart

^DJI data by YCharts

The point being, the stock market is just a sideshow. The real gains are in gold, silver, and the precious metal stocks. Of course other commodities have been very strong as well, but I still see the most upside in the precious metals.

Investors have continued to shun this sector as they have become fixated with chasing general equities, but they fail to realize what is taking place in gold and the new bull market that has emerged.

Some Individual Performers

While Nvidia (NASDAQ:NVDA) has been a darling of Wall Street for the last several years, since 2016, many gold and silver stocks have either performed inline with NVDA or surpassed its performance. Coeur Mining (NYSE:CDE) is up 290% from the beginning of last year, and at one point it was sporting gains of over 500% in 2016. I included the performance of several other gold and silver stocks below, but there are many more names that I could have listed as well.

NVDA Chart

NVDA data by YCharts

For example, Barrick Gold (NYSE:ABX) has increased 170% since 2016. This is the largest gold company in the world and has been generating strong returns for shareholders over the last 15 months. Actually, the gains are even greater if you include the return since the fall of 2015.

ABX Chart

ABX data by YCharts

Some might be asking: Given the enormous increases in these precious metal stocks, does that mean the run is over?

Hardly, as Barrick’s stock price looks like it’s barely off the mat compared to where it was at in 2011.

The same goes for the rest of the stocks in the sector, as the gains in the HUI from the lows are a blip when you step back and look at the big picture.

Gold and silver companies are also much stronger now than they were 5-6 years ago in terms of cash costs and balance sheets. Some are generating more cash flow today than they did at the peak in 2011, yet their stock prices are still a fraction of what they were back then.

There is still enormous upside to this sector and this bull market is very young.

Consolidation Complete

The HUI almost tripled in value from the January 2016 lows to the summer 2016 peak. Since then it has been going through a period of consolidation in order to digest these massive gains. But it appears as though this consolidation phase is now wrapping up as the HUI has now broken out of this downtrend that has been in place since August 2016. A return trip to 285 is very likely at this point.

Gold On The Cusp Of A Major Breakout

Physical gold has also been consolidating since last summer, and you can see that the metal topped right at the massive overhead resistance that goes all the way back to the 2011 peak. Now it’s once again making another attempt to get above this key level – GLD is literally 0.50 points away. Once this is taken out then any shorts left are going to be in trouble. Gold should experience a very strong move higher as soon as the red line is breached.

What About Interest Rates Hurting Gold?

Some investors believe that a rising interest rate environment is detrimental to gold, it’s just the opposite in a situation like this. Yes, interest rates are moving higher, but they are still well under the rate of inflation and we have inflation on the rise now. This is a very bullish environment for the precious metals.

Every time the Fed has raised rates over the last 1.5 years, gold has immediately increased. As I mentioned above, it’s no coincidence that gold bottomed when the Fed raised rates for the first time in 9 years in December 2015. Each of the two successive hikes have also resulted in strong gains for gold.

Gold is rising during this interest rate normalization process because the Fed is now chasing inflation. Every inflation gauge in the U.S. is showing an increase in cost pressures throughout the economy. You can feel the concern building too, especially with the fed funds rate still at extremely low levels. The Fed was already well behind the curve, and 25 basis point hikes every so often just aren’t enough to get in front of the situation, let alone catch up as costs are rising at a greater clip now. If anything, the Fed is getting further behind, which is worrisome (but also very good for gold).

The Personal Consumption Expenditures price index is released by the Bureau of Economic Analysis and is the Fed’s preferred inflation gauge. The headline PCE number came in hot in January, as did the core figure (ex food and energy). February’s figures weren’t as strong but the percent change from one year ago moved up to 2.1% for the headline number.

The concern here is that the Fed Funds rate is still under the PCE inflation rate. As you can see in the graph, the PCE has never remained above the Fed Funds rate for this long of a time period. Inflation has been building and once it gets going it’s very hard to stop. Quarter point hikes 2-3 times a year isn’t really making progress.

Other inflation indexes have been on the rise as well. While the core CPI has been steady at around 2.2%, the headline figure has been increasing sharply and is now at a 5 year high. I believe we will see the core CPI break out here in the next few quarters.

The Producer Price Index is also showing building inflationary pressures, as the core reading in February came in at 0.3%. That is the highest reading since April of last year, but more importantly, the back-to-back monthly figures are showing a worrisome trend.

The Fed minutes from the March meeting contained several references to these higher inflation figures, along with the threat of increasing inflation due to the low unemployment.

A few quotes from the minutes:

In contrast, some other participants continued to express concern that a substantial undershooting of the longer-run normal rate of unemployment, if it was to occur, posed a significant upside risk to inflation, in part because of the possibility that the behavior of inflation could differ from that in recent decades. Participants generally agreed that it would be appropriate to continue to closely monitor inflation indicators and global economic and financial developments.

Several other participants judged that–with the headline PCE price index rising nearly 2 percent and the core PCE index increasing close to 1-3/4 percent over the 12-month period ending in January–the Committee essentially had met its inflation goal or was poised to meet it later this year. In the view of these participants, such circumstances could warrant a faster pace of scaling back accommodation than implied by the medians of participants’ assessments in the SEP.

In Summary

Gold, silver, and the HUI been far outperforming the major U.S. indices since the beginning of 2016. A trend that I believe will continue. Unfortunately, not many investors have taken advantage of this bull market as they are still chasing gains in general equities. Investors need to start focusing on opportunity cost as these metals and metal producers are generating greater returns than the stock market.

The precious metals sector has been consolidating its gains since the summer of 2016, and now it is starting to breakout from the downtrend that has been in place since that time. Even though the returns have been very robust, the upside is still substantial.

The threat of higher inflation is going to keep this bull market in gold firmly intact, and rising interest rates aren’t stopping it either.

If you would like more in-depth coverage of the sector, you can subscribe to my service The Gold Edge here on Seeking Alpha. There is also currently a limited-time, free-trial offer.

Disclosure: I am/we are long VARIOUS GOLD AND SILVER STOCKS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.