Is Gold’s Rally Signaling a Recession? VIEW IN BROWSER By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Wake me up when September ends
- Gold hits a record high as stocks drop
- Why that’s likely not a warning sign
- A great gold stock our quant expert traded for 38%
- Some notes on our monthly rotation model
Stocks took it on the chin yesterday… The S&P 500 finished the day down 0.7%. The tech-heavy Nasdaq 100 also was down, at 0.8%. Welcome to September. Taking the long view, this is the worst month of the year for stocks… and it’s not even close. Using our Seasonality tool, we can take the past 75 years of data and smooth it out into a chart for the S&P 500. We see a noticeable drop at this time of year. Going back to 1950, the S&P 500 has fallen more than half the time in September. On average, taking up years and down years, it has lost about 0.9%: 
But that’s the last 75 years, you might say. Surely, the 21st century is more relevant? You’d be right, and we can do that. But it paints an even more bearish picture… Since 2000, the S&P 500 has also been down more than half the time. But the average loss was worse, at -1.6%: 
Now, this is no guarantee that stocks will take a bath this month. August’s positive return shows us that seasonality is just one piece of the trading puzzle. Last year, for instance, the S&P 500 rose more than 2% in September. Some sectors have also outperformed in September. On Friday, we identified Discretionary stocks – a typical “risk on” kind of group – as the best bet to make for the month. So while history favors a down month in September, we can’t just throw in the towel. Instead, we should look at what else is working in the market and find a trade. Speaking of, check out gold… Gold is trading at more than $3,500 – its highest level ever. 
Gold tends to do well when interest rates are low because it’s not competing with high yields on bonds. It’s also historically seen as a risk-off hedge when stocks turn down. But there’s another way to interpret gold’s rise… Traders may be buying gold because they fear the rate cuts that the Fed has been flagging could signal a recession. Gold tends to do well in recessions. Despite the bullish narrative surrounding rate cuts right now, it’s rarely been associated with stock bull markets in the recent past. Take 2020, for example, when the Fed started cutting rates in the months leading up to the pandemic-led recession (gray shaded area below). As the Fed Funds rate dropped (blue line), gold rallied (purple line), while stocks sank (red line): 
But the 2020 recession lasted only a couple months. Let’s keep looking. In 2008, gold began to rally as the Fed started cutting rates ahead of the Great Recession. It wasn’t a straight line up, but it did well while stocks struggled: 
We can see the same dynamic in 2000. The Fed started to cut rates near the top of the dot-com bubble, stocks dropped, and gold rallied: 
Of course, these were all recessions. And they’re all examples of the Fed embarking on sustained rate-cutting campaigns. What if that’s not what we get this time? What if we get a slower rate-cutting cycle and no recession, like we saw in 1995? In 1995, the Fed began cutting rates from a high of 6% and to a low of 5.25% in 1996. During that time, gold rallied from about $350 to $400 an ounce: 
The difference here is that stocks really took off. As the Fed slowly eased, the S&P 500 rallied from about 500 in 1995 to more than 800 by 1996 – outperforming gold’s rise. And there wouldn’t be a recession for five more years. This is a more likely setup today. Even with a new Fed chair coming in May who is sure to be more rate-cut friendly, it doesn’t seem like we’ll see rates rapidly drop. Instead, they’ll be managed slowly lower in response to the inflation and employment data. That doesn’t mean it’s a bad idea to hold gold… And if you think it’s going to go higher, you have to like gold mining stocks even more. Gold mining stocks are leveraged to the price of gold. Gold miners’ costs are mostly fixed -- wages, equipment, energy. When gold prices rise, every extra dollar above those costs drops straight to the bottom line. That means a small move in gold can translate into a much bigger move in mining profits, and by extension, their stock prices. This group has been outperforming lately, with the VanEck Gold Miners ETF (GDX) up more than 25% since August, while gold is up 6.7%: 
You can buy the ETF and do quite well in a gold bull market. Or you can take on a little more risk with an individual gold mining company and potentially do even better. One stock worth looking at is Alamos Gold (AGI). This large-cap Canada-based gold miner has outperformed the GDX ETF in August, and happens to have one of the highest Quantum Scores for the sector: 
Jason Bodner’s Quantum Score is the distillation of the core factors that make any stocks great. It looks for high revenue, profit, and earnings growth… alongside strong price momentum and large-scale buying pressures. The higher the score, the better the stock. AGI rates a supremely strong 94.9 – the top echelon of rated stocks. It’s also been outpacing GDX since the start of August. This score is what led Jason to successfully trade AGI in his Quantum Edge Pro advisory for a 38% gain in about 10 months. Learn more here about Jason’s approach and how to access his most recent pick in a little-known semiconductor company. Finally, the new top five for the Nasdaq 100 is in… Regular readers over the past few months have gotten to know our monthly rotation strategy on the tech-dominated Nasdaq 100. To recap, this is an algorithmic model that trades the top five stocks in the Nasdaq 100 index each month using an exclusive machine-learning algorithm. Once you see the performance, you’ll understand why. Buying the top five stocks and holding for seven years has outperformed the Nasdaq 100 by about 4 to 1… Then, when you take the same five-stock model and rotate/rebalance once per month, it actually beat the index by 5 to 1 over that same time. To answer a common question about this model, it is not yet available to subscribers. We will be making it available soon to our Platinum subscribers to follow along with in TradeSmith, but it’s not there yet. Until then, I’ll update you on the latest selection of stocks at the top of each month here in TradeSmith Daily. Let’s first look at how each asset performed in August. Then, we’ll check the five new stocks for September. As you can see, this was not a good month for the rotation model: 
Let me take this opportunity to explain what it’s like to follow this model. Turn your attention to the long-term chart I shared back in July when we first started talking about this. The green line below is the monthly rotation strategy going back to 2018. The orange line is the result of holding the top five stocks at the start of 2018, making no changes and no rebalancings. And the blue line represents the Nasdaq 100 via the Invesco QQQ ETF (QQQ). What we can see is that this model provides strong long-run outperformance, but not without some wild volatility: 
In the 2022 bear market, for example, the model dropped by more than half peak-to-trough versus a loss of about 38% in the Nasdaq 100. From the end of 2024 through the Liberation Day lows, the model dropped about 40% versus a drop of about 23% for the Nasdaq 100. That is the tradeoff for the outperformance. When you’re so concentrated in specific stocks, especially those that are selected based on potential future performance, you’re going to get drawdowns like this. August was another one of those months, following an above-average month in July when the model returned an average of 10.8% versus 2.2% for the Nasdaq 100. As for September, the holdings have changed once again. Advanced Micro Devices (AMD) is out, and Shopify (SHOP) is in: 
As with past months, if you’re following this strategy, you would adjust your holdings to all be of equal weight. In this case, you would sell the AMD position entirely and then take profits or losses on the other positions to get them to equal weighting once again. More to come on the monthly rotation strategy and how you can get access to it very soon. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily | 
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