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The gold price takes a $125 round trip into 2021

Commentaries & Views

After posting its best annual performance in a decade during a turbulent 2020, gold rang in the new year with a $125 roller coaster ride this week. The price of bullion rallied significantly to kick off the year on Monday, rising over $50 higher above its down trend line as a weak U.S. dollar slipped to 2018 lows. 

However, this huge gain in the safe-haven metal to begin 2021 was short-lived. Once the Georgia runoff election results showed a Democrat sweep being imminent, risk-on in the marketplace quickly erased gold’s gains on Wednesday morning. But that was before U.S. politics went into complete disarray later in the day.

As the final votes in Georgia were being counted, which would determine the political fate of the U.S. Senate, thousands of protestors stormed the U.S. Capitol defying officers in riot gear and causing the building to go into a complete lockdown. While the stock and financial markets continue to climb, ignoring the violent protest in Washington, safe-haven buying had come into gold to stabilize the price above $1900.

But the $1900 level in February Gold Futures has been lost this morning. The safe-haven metal is seeing heavy selling pressure towards strong support on its 200-day moving average at $1838 amid rallying global stock markets that have taken the U.S. indexes to record highs this week. Thus far, the mood on Wall Street has not been dampened by the just released and downbeat U.S. Non-Farm Payrolls report (NFP) which showed a decline of 140,000 in December, versus a rise of 245,000 in November.

Despite the reversal in gold this week, I expect investors will soon begin to re-focus on the main drivers still supportive of higher gold prices. Now that the U.S. political situation has stabilized, with the confirmation of Democrats controlling all three branches of government, this “Blue Wave” is expected to create an ocean of green digital dollars not long after the Biden administration takes over on January 20th.

The last time Democrats controlled the House, Senate and White House, gold was trading below $900 per ounce in November, 2008. After they lost the House in 2010 the gold price peaked at $1920, near where it is trading today. The Federal Reserve’s balance sheet, however, has ballooned from $2 trillion in 2010 to over $7 trillion and rising at present.

Deficit spending is set to surge in the U.S. this year, and just about everywhere else.  Global central banks are projecting to maintain their ultra-easy monetary policies in 2021, even with the global economy anticipated to accelerate away from last year’s coronavirus-inflicted recession. In Bloomberg’s quarterly review of monetary policy that covers 90% of the world economy, no major western central bank is expected to hike interest rates this year.

Because of the continuation of ultra-loose central bank monetary policies, gold is poised for another rally after the end of a 4-month consolidation process that likely ended late last year. Already, a collective shift in mindset has been detectable across asset prices, and markets already appear to be adjusting for the risk of inflation.

After being in a decade long bear market, commodities have surged since making a significant low during the 2020 March panic. In fact, the Bloomberg Commodities Index just broke through 12-year resistance, and Dr. Copper recently blew through 8-year resistance at $3.25. As main street continues to suffer, there is a bull market in just about anything you can trade your paper currency for, which is creating stagflation.

Meanwhile, the GDX bounced with rising volume today, as bargain hunters brought the ETF into a positive weekly close after filling its upside daily gap from Monday. Although this reversal has taken away earlier miner gains at the time of this writing, both the GDX & GDXJ remain in weekly uptrends from their respective November lows.

With bullion having made three consecutive quarterly closes above $1800, which was formerly multi-year resistance, gold stocks are significantly undervalued compared to the S&P 500. Analysts at the investment firm of Sprott Inc., pointed out to Kitco this week that the S&P 500 Index trades at 16.3x EV/EBITDA, and gold miners trade at 7.6x EV/EBITDA, representing a 50% discount.

Moreover, investors and fund managers continue to bid up quality juniors since the low in gold was struck at $1767 last year on November 30th, evidenced by the GDXJ/GDX ratio trending higher since that time.

Seasoned sector speculators realize underground gold reserves held by major mining firms continue to be low and falling, while reserve replacement remains a key problem for the industry. In fact, we saw another junior miner being taken over by a major this week. Agnico Eagle Mines (AEM) agreed to buy TMAC Resources for about $286.6 million, two weeks after Canada’s government rejected Shandong Gold Mining’s bid for the indebted company on national security grounds.

Agnico's offer represents a 26% increase from Shandong's offer and a 66% premium to TMAC's 20-day volume-weighted average price. After years of underinvestment during the previous bear market, global miner production profiles are under pressure which makes further M&A deals likely this year.

Now that a Democratic Blue Wave is expected to create an ocean of Green Dollars, I expect a resultant Gold Tidal Wave to ignite the entire precious metals complex once the Biden administration takes over the U.S. economy in a few weeks.

The gold bull has a tendency to make false moves in the opposite direction to buck off as many riders as possible before resuming its climb higher. Today’s weakness is providing lower risk entry points on quality juniors before the next leg higher in the gold bull begins.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.