A Golden Opportunity in Gold Stocks is Upon Us
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
As concerns over the impact of trade wars on global growth have roiled markets, stock indexes have been experiencing their most turbulent month of the year so far. Falling stocks, combined with the surprising drop in global bond yields, are continuing to make gold look more attractive while it simmers below $1300. One of the main concerns about falling bond yields is the risk of an inverted yield curve, which could pose a threat to the U.S. economy.
Fed Fund Futures latest data shows a 57.7% chance of a rate cut in September, with an 89.6% chance of a cut by the end of the year. A WSJ article this week entitled ‘Fed Would Consider Interest-Rate Cuts if Growth Outlook Darkens’, mentioned the central bank has begun “conditioning” our “expectations” for a new season of quantitative easing.
Bond traders are worried about growth deceleration, thinking inflation is dead. A disappointing Non-Farm Payrolls (NFP) report next Friday may increase the chance of the Fed beginning the next rate-cut cycle, which would ignite the sleeping gold complex in the not too distant future.
With investors contemplating the effects of the slowdown in global growth, ongoing Brexit fears, and the year-long trade dispute between the U.S. and China, gold continues to exhibit back-and-forth price action after a riveting Q1 to start the year. The safe-haven metal has been quietly building a base at the $1275-$1280 level since mid-April and refuses to break down below this region, even though a strong U.S. dollar continues to trade at 2-year highs.
Gold prices came roaring back into 2019, while global equities were being sold into the new year. The yellow metal rallied all the way above the $1345 level and moved very near the batch of resistance that held last year’s advance in the $1365 region. But the bulls lost control yet again just below what has now become a nearly six-year “Maginot Line” of resistance at $1375.
Prices began to pull back in February and have managed to maintain a test of the big support zone that runs from the $1275-$1280 area in the futures market. Gold prices have been in varying forms of consolidation ever since and this marks nearly three months of digestion following the aggressive rally that lasted from August of last year into February of this year.
Meanwhile, the GDX has been mired in a lethargic sideways trading pattern since mid-April and is attempting to remain above its 200-day moving average. The global miner ETF has been under-performing gold once resource investors began liquidating miners a month early this year. The old market adage "Sell in May and Go Away!" has a more ominous meaning in the highly volatile precious metal space. Based on historic precedent, resource speculators are conditioned to selling the complex in the spring and going away for the summer before returning towards the end of August.
However, many Canadian speculators who made out-sized gains in the cannabis space, began to liquidate losing gold stock positions early this year to pay taxes by the deadline of April 30th. Moreover, many momentum traders and speculators continue to ignore most of the resource sector altogether. Although the GDX has not moved much over the past month, many juniors in the complex continue to be sold off, while others have seen trading volume slow to a trickle.
This has created an excellent buying opportunity in the junior resource space for long-term, cashed up contrarians. Recent trading action in the precious metal’s equity complex is reminiscent to the environment of late 2015. The first leg of this nearly eight-year bear eventually ended with a six-month base in the GDX, which was formed during the last half of 2015. This strong bottom remains in place today and was created after losing over 80% of its value from all-time highs set in late 2011.
After a six-month reprieve, which saw the global miner ETF zoom over 150% from the aforementioned base, gold equities have tacked on another frustrating three years of gradual lower prices in what has morphed into the second phase of an ongoing brutal bear market. While phase one of this bear was sharp and pronounced, the second phase has been more akin to Water Torture, as the decline has slowly worn out most long-suffering participants.
Long-time Kitco friend and contributor David Morgan has coined an apt phrase regarding the silver complex. Saying, ‘Silver will either scare you out or wear you out’, which can also be applied to the junior resource equity space. The first bear phase scared out most generalist investors and the second phase has worn out the rest. Hence, there are not many left to sell, creating a rare opportunity for long-term speculators searching for deep value opportunities.
During this second phase of the bear, investor apathy towards gold equities has reached a crescendo and the general trend towards passive investing has led to the world’s largest gold companies recently announcing a series of massive mergers. This new wave of merger activity is reminiscent of what the gold mining industry experienced in the late 1990's and early 2000’s.
Large miners Santa Fe, Homestake, AurionGold, TVX and Echo Bay all disappeared in a series of +/-$2 billion transactions while the price of gold languished. CEOs sought rationalization and exploration departments of the majors hid underneath their desks for fear of being fired, which echo’s the feelings of many in the space today.
What followed, during the birth of a new century, was a rebound in gold and precious metal equities that changed the paradigm, while rewarding long suffering investors with an exciting decade of opportunity. New companies were born from discarded assets such as Canadian Malartic into Osisko Mining, Haile into Oceana Gold, and Macassa into Kirkland Lake Gold.
There was a mad dash to build new exploration and development companies and many were taken over, as the cycle of risk taking and reward returned. The industry even got creative and spawned a whole new business model called “streaming” with a number of today’s leading players being the result of this new method of financing.
The current economic climate, combined with extreme investor apathy towards the resource space, has set up a rare buying opportunity even more lucrative than the one created at the turn of the century. As the HUI, relative to the price of gold, is lower than where it bottomed in late 2000. Investing into a basket of carefully chosen, undervalued juniors today, is much less risky than waiting until after the gold price eventually moves above $1375 per ounce.
Historically, once the sector has made a significant bottom, global miners and royalty firms are the first to move higher, followed by mid-tier producers and then the higher risk juniors. If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/