Stocks ended Friday mixed as both the S&P 500 and Dow Jones Industrial Average ended the day in negative territory, while tech stocks pared losses to finish the week. Investors are still digesting yesterday’s sharp sell-off in both the stock and bond markets. While all three indexes posted positive gains for the month, the Nasdaq posted its worst weekly loss since October.
Inflation is on every investor’s mind, which is why we are seeing Treasury yields rising. Gold has also been trending down as of late, but I believe that will change soon. And when it does, I think it will drive up prices for gold mining stocks such as Barrick Gold Corporation (GOLD – Get Rating), Newmont Corp. (NEM – Get Rating), and Kinross Gold Corporation (KGC – Get Rating).
Before I tell you why I believe why now is a great opportunity to invest in gold, let’s take a more in-depth look at how the market has performed over the past week.
This week has been a wake-up call for investors. We saw a surge in bond yields that led to a sell-off in both treasuries and stocks Thursday. The yield on the 10-year note briefly soared above 1.6%, its highest level in twelve months. This created weakness in growth stocks, especially the Nasdaq, as it plummeted 3.5%, its worst day since October.
The rise in rates was likely due to many factors, including improving economic outlook, rising inflation concerns, and a historically weak 7-year Treasury note auction. Treasuries stabilized today with the 10-year note finishing with a 1.4% yield, but the S&P 500 and Dow Jones were still negative on the day. The Nasdaq was able to rebound for a 0.5% gain.
As we’ve seen over the past few months, the stock market is rallying on the expectation for a robust economic recovery. Add to this the expected $1.9 trillion relief bill, an extremely low Fed rate, and an expanding Federal balance sheet, and you have all ingredients for inflation.
Gold has historically risen in inflationary periods, but that hasn’t been the case so far. In fact, gold just posted its worst monthly loss since 2016. What’s going on?
The belief is that investors are concerned that the Federal Reserve will raise rates to combat this expected inflation. But I think they’re wrong. The Fed has all but written in the sky that they have no intention of raising rates until next year or the year after.
I believe that at some point, in the not too distant future, the Fed will reassure the markets that it won’t be raising rates anytime soon and signal that it might take measures to keep yields down. When an announcement like this is made, gold prices should rally significantly.
However, until this happens, yield prices might continue to rise, and if that happens, gold could continue to fall.
Also, with both the Fed increasing their balance sheet and more fiscal stimulus, we will continue to increase our massive debt. I see this as a significant positive for gold prices, as high debt levels have shown a strong correlation with higher gold prices. This is why I am recommending my three top gold mining stocks below.