Gold attempting to bottom as Biden fuels the helicopters
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Early Thursday morning, the European Central Bank (ECB) signaled faster money-printing to keep a lid on euro zone borrowing costs. Concerned that a rise in bond yields could derail a recovery across the 19 countries that share the euro, the ECB said it expects its 1.85 trillion Pandemic Emergency Purchase Program (PEPP) purchases to ramp up at a "significantly higher" pace over the next quarter than during Q1. ECB President Christine Lagarde also warned against premature policy tightening.
Then a few hours later, U.S. President Joe Biden signed his $1.9 trillion stimulus bill into law, commemorating the one-year anniversary of a U.S. lockdown over the coronavirus pandemic. Before being sent back to the House of Representatives for final approval earlier this week, no Republican voted yes on the bill in the Senate, where bills usually require the support of 60 senators.
Although Republicans rejected every amendment, Democrats tweaked the coronavirus relief bill to ensure all 50 of their members would support it. The bill was advanced under a legislative maneuver known as reconciliation, which allows passage with a simple majority vote.
The newly elected president's $1.9 trillion "helicopter drop" shows there is a complete lack of confidence in his administration from a global capital perspective, being twice the size of the National Debt up to President Ronald Reagan. This includes debt accumulated from World War I, World War II, Korea, and Vietnam. When Reagan was president, I recall the public outrage when the National Debt hit the headline grabbing figure of $1 trillion, while the Biden administration is just getting started.
The President laid the groundwork for an infrastructure package during last year's campaign by proposing $2 trillion in "accelerated" investments to shift to cleaner energy, build charging stations for electric vehicles, support public transit and repair roads and bridges.
Last week, the president met with eight members of the House committee on transportation and infrastructure, a follow-up to a February 11th meeting with senators on infrastructure. The American Society of Civil Engineers said $5.9 trillion must be spent over the next decade for safe and sustainable roads, bridges and airports, which is about $2.6 trillion more than what the government and private sector spend.
But the main monetary policy event investors are anticipating will be held next week on March 16-17, when the Federal Reserve Open Market Committee (FOMC) meeting takes place. It's been no secret that the biggest culprit sending gold prices lower since August has been the surge in rising bond yields.
After the Fed under Jerome Powell has already purchased more U.S. Treasuries than it did under Bernanke and Yellen combined, coupled with the $1.9 trillion in Covid-19 relief spending, investors are worried that a roaring economic comeback will cause prices to soar.
Gold prices are expected to get fresh direction from the FOMC meeting next week, as the central bank can now factor in $1.9 trillion worth of stimulus and its implications. Investors and computer-based algorithm trades will be focused on how the central bank plans to address rising yields in the future during Fed Chair Jerome Powell's press conference at 2:30pm EST on March 17th.
In the meantime, deeply oversold gold futures have bounced from the $1670-$1690 region, coinciding with the 10-year U.S. Treasury yield reversing since peaking above 1.6% last week. After a 20% decline from its August 2020 all-time high of $2089, bullion had become more oversold than its panic low at $1450 seen exactly one year ago.
Technically, the $1690 level is providing support into the FOMC meeting next week, being the .382% Fibonacci retracement zone from golds rise off of the significant low made in late 2015 at $1045. If the safe-haven metal can maintain this bullish momentum after Fed-speak next Wednesday by making a close above $1800 for a fourth consecutive quarter on March 31st, odds of a sustainable bottom being in place would increase.
Furthermore, as stated in this column last week, the miners have continued to show relative strength to the gold price since the GDX tested and held its 7-year breakout level at $31. Once we see a weekly close above $35, odds of a sustainable bottom being put in place in the miners would also increase.
Another event gold stock investors should pay attention to next Friday is the quarterly rebalance by VanEck of both the GDX and GDXJ miner ETF's. For the past few years, I have been a harsh critic of GDXJ no longer representing the junior space. But this upcoming rebalancing event should further reduce the overlap between the two exchange-traded funds.
VanEck miner fund manager Joe Foster is cognizant of the issue, as an emphasis on gradually reducing the overlap between the GDXJ and the GDX is being addressed. RBC analyst Wayne Lam expects the Junior Gold Miners ETF to keep adding companies. With investors having become increasingly focused on the junior end of the GDXJ, Lam believes this means there is an increase in the number of firms that are eligible for inclusion.
The GDXJ added almost 30 new junior gold companies last year, including 10 in the fourth quarter. The two ETF's overlap by almost 50% in the companies they include and 70% in market capitalization, while the market cap overlap has declined from an average of 80% in 2018 and 2019.
M&A chatter has also perked up recently, as per usual during conference month in the mining space. Just after the virtual BMO Global Metals and Mining Conference concluded last week, a mega-merger idea was leaked to South African newspaper Business Day by Sibanye-Stillwater (SBSW) CEO Neal Froneman. The South-African based miner floated the idea that the company should merge with peers Gold Fields and AngloGold Ashanti to create a gold mining leader which would beat Newmont Corp (NEM) out of the top spot.
Then during the virtual Prospectors & Developers Association of Canada (PDAC) conference on Wednesday, Newmont announced it is acquiring all the shares it doesn't already own in Canadian explorer GT Gold (GTT.V) in a cash deal valued at C$393 million. GT Gold reached an all-time high on Wednesday, closing up 59.7% to C$3.21 on news of Newmont's all-cash acquisition at $3.25 per share, a 38% premium to GT's 20-day VWAP.
These developments come as miners are flush with cash and ready to expand through acquisitions, with resurgent demand and supply shortfalls driving up metals prices and company earnings to levels not seen for a decade. Pent-up demand for acquisitions should increase, as the travel restrictions associated with Covid begin to be lifted and projects can be visited.
Longer term, the industry is expected to undergo further consolidation as it becomes more expensive to operate and build mines due to declining ore quality and rising environmental and social expectations.
Over the past 6 months, the Junior Miner Junky real money portfolio has sold two juniors for triple digit gains after each were acquired by a major gold miner. If you require assistance in choosing a basket of M&A candidates, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.