KEY POINTS
  • Gold had a big day Monday after Warren Buffett's Berkshire Hathaway revealed a stake in gold miner Barrick Gold, a surprise to many given Buffett's long-held negative take on gold as an investment.
  • The price of gold has been trading at or near an all-time high in this summer, but the rally slowed last week.
  • When gold sells off in a week by 5% or more, history says the Dow is set to rise in the near-term and the metal continue its dive. 

Gold had its best day since April on Monday, but market history says it may be time to bet against the precious metal.

A surprising development helped to propel gold higher: long-time gold naysayer Warren Buffett's Berkshire Hathaway revealed a big stake in gold miner Barrick Gold. While Buffett has dismissed gold as a shiny, useless "cube" in the past, Berkshire's bet could signal that even it sees value in gold as a market and inflation hedge.

But don't read too much into the 2.5% one-day gain. Stocks — in particular the Dow Jones Industrial Average — may prove to be a better bet in the short-term, according to information from hedge fund trading tool Kensho.

Granted, gold is having a great year, up over 31% and on pace for its best annual rally in a decade. But when gold spiked on Monday it was the highest level for the gold trade since August 11, and that's revealing in a potentially negative way. The precious metal took a sizable hit last week, declining by roughly 5%. 

That ended a nine-week rally for gold, and since 2010, when thep precious metal suffers a one-week decline of 5% or more, it signals that it's time to buy the Dow, according to Kensho.

When gold falls in trading, market history says it presages a Dow rally.

Over the past decade, gold has dropped by 5% or more 12 times and in a majority if the instances, gold remains negative over the next month while the Dow rises.

The SPDR Gold Shares ETF,  the biggest gold fund, sheds about 1%, on average, trading negatively 59% of the time. Meanwhile, the Dow tends to get a boost, gaining 2.6%, on average, in the one-month trading window after gold has a big weekly loss, with the blue-chip stock index trading positively 67% of the time.

Analysts noted that gold had been pressure by action in U.S. government bond yields, at the 10-year Treasury yield jumped to a seven-week high last week.

A worker places gold jewelery into a melting furnace at the Austrian Gold and Silver Separating Plant in Vienna, Austria.

But some market strategists expect speculative trading in gold to continue. "The sharp pullback in prices and the price action that has followed has revealed quite a bit about the underlying extent of speculative appetite for precious metals," Daniel Ghali, commodity strategist at TD Securities, told Reuters on Monday, adding that the fact Warren Buffett has now "embraced gold" is helping sentiment.

Also helping gold on Monday was was weakness in the dollar and a reversal in the 10-year U.S. Treasury trade from last week.

"We'll be above $2,000 per ounce before Fed minutes, and north of $2,250 by the end of year," Bob Haberkorn, senior market strategist at RJO Futures, told Reuters. The minutes from the Fed's most recent FOMC meeting are due out Wednesday.

Gold settled at just-under $2,000 on Monday, but on Tuesday morning hit a high of $2,017.6 while the Gold Miners ETF was up more than 2%, led by Harmony Gold, DRDGOLD (DRD) and Hecla (HL). In early August, gold surged above $2,000 per ounce for the first time. Some market experts believe the pandemic has added to interest in gold, as well as election uncertainty in the U.S., and a successful vaccine as well as resolution to presidential uncertainty could weigh on gold further out.

While stocks and gold have risen in tandem during the recent market recovery, it was the Dow and not gold trailing the market on Monday. Wall Street also has been fending off concerns over stalled coronavirus stimulus negotiations and simmering U.S.-China tensions.

Gold bulls see more room to run

Gold bulls, meanwhile, don't seem to be running scared.

Gold-backed exchange-traded funds have recorded eight consecutive months of positive flows, and added near- $10 billion in July, according to the World Gold Council.

Standard Chartered Private Bank's Manpreet Gill said last week's pullback in gold prices was because of U.S. government yields, and the strategist told CNBC: "As long as yields stay below 1%, that doesn't really alter our longer-theme that ... central banks have really liked to do whatever they can to keep bond yields capped."

The yield on the 10-year U.S. government bond is below 0.70%.

"We think gold's run ... hasn't quite finished yet," said Gill, head of fixed income, currencies and commodities investment strategy at the bank.

"It's quite easy to see gold going to $4,000," Frank Holmes, CEO at investment firm U.S. Global Investors, recently told CNBC about the years to come, pointing to the trillions of dollars needed in stimulus to help the U.S. economy during the pandemic, and the policy steps taken by central banks around the world.

"We've not seen this level where central banks are printing money at a zero interest rate. At zero interest rates, gold becomes a very, very attractive asset class," Holmes told CNBC.