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Global Miner Consolidation Continues Along with Gold

Commentaries & Views

Before the ink had much time to dry on the finalized Barrick-Randgold deal, Newmont Mining Corp. announced it was buying Goldcorp, Inc. on Monday for $10 billion to create a gold producer that will top Barrick’s now $24 billon market cap once completed. The agreement will combine two gold industry leaders into Newmont Goldcorp, to create an unmatched portfolio of operations, projects, exploration opportunities, reserves, and people in the gold mining complex.

This deal brings more investor attention to an undervalued sector, which may have formed a significant bottom late last year. While gold was forming an accumulative rounded bottom, junior developers, who are in the process of proving up high-margin projects, were being sold for tax-loss. Many of these sub-$200M market cap companies remain deeply undervalued in comparison to where they were trading the last time gold was being bid near $1300 in early 2018. Once gold climbs above $1300, the market will be gradually re-rating high-margin project developers, or producers will be acquiring them, as I expect M&A to continue this year.

Meanwhile, the overbought gold price continues to consolidate in a $20 range above $1280 after making an eight percent move higher in just eight weeks. Although the overall trend in gold is clearly higher, it has run into strong resistance after a long rally and is attempting to work off an extreme overbought situation by consolidating in this tight range. As mentioned in last week’s missive, gold has very strong resistance in the $1300-$1309 region and an overbought consolidation, as opposed to a breakdown from this area, is encouraging.  

Another positive scenario taking place is gold beginning to rally with the stock market and remaining well bid despite the recent strength in the U.S. dollar. Bullion accumulation is being driven by political events as are the currencies and share markets and is reflecting investors uneasiness about what lies ahead.

Together with these political events, the recently dovish Fed has also been supporting the gold market and placed the overbought U.S. dollar into a downtrend since early December. This Fed induced weakness in the world’s reserve currency, along with global market volatility, influenced the market to begin pricing in the possibility of a rate-cut. If the Fed indeed cuts rates later this year, it could easily be the catalyst to break gold out of the rounded base below $1375 it has been forming for nearly six years.

Since the Fed is data-dependent in its approach to rate hikes, high on that list currently is the Chinese economy. More evidence of a material slowdown in the Chinese economy could downgrade global growth prospects, so the Fed is closely monitoring Chinese trade tensions with the U.S. and any major moves in the Chinese currency, the renminbi.

The other thing to keep a close eye on for a possible future rate-cut, though not directly controlled by the Fed, is the slope of the U.S. yield curve. An inversion between 2- and 10-year yields is a closely watched signal as that has preceded almost all the American recessions of the past half century. An inverted yield curve is when short-term rates are above longer-term rates and has historically been very bullish for gold when remaining inverted for a long period of time.

However, in the short-term, both the GDX and silver have begun to underperform gold, while the stock market has reached overhead resistance. Volume in the major miner ETF has slowed to a trickle as it awaits a catalyst to resolve the consolidation in gold which began with the new year. The catalyst for either a breakout, or breakdown, from this 3-week consolidation may be the outcome of the first FOMC meeting of 2019, which takes place on January 29-30th. In an effort to become more of a presence to investors, Fed Chairman Jerome Powell will be holding news conferences after every central bank meeting this year.

I am giving a presentation at the Vancouver Resource Investment Conference (VRIC) this Sunday, January 20th, at 11:20am in Workshop 2. I will be discussing investment and research strategies for building a successful junior gold stock portfolio. If you are planning to attend, please stop by and say hello.

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