Getting ahead of the precious metals and commodities rebound
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
This year has seen a correction in the gold price, commensurate with rising interest rates/ bond yields, and the spectre of more to come. The precious metal has also been hammered by a strong US dollar, which is negatively correlated to the gold price.
Spot gold has fallen from $1,801.40 at the start of the year, to $1,666.45 currently, a drop of 8%. On Sept. 15, gold plunged to its lowest level since April, 2020, on expectations of a 0.75% interest rate increase by the Federal Reserve, which happened on Sept. 21.
In fact the Fed has raised interest rates an astounding five times this year, to combat 40-year high inflation. The CME FedWatch Tool expects at least another 0.75% increase when the Federal Open Market Committee meets in early November.
Gold investors are being warned the gold market could continue to struggle through year-end as higher interest rates support the US dollar.
“The longer the Fed continues on its current path, the longer that a strong dollar will depress the gold price," commodity analysts at Heraeus Precious Metals wrote in a report. Also weighing on gold is the fact that the markets keep pushing out any “Fed pivot", referring to a shift from monetary tightening to easing, as a result of poor US economic performance and/or the widely anticipated recession. According to Kitco News, the markets don't see a pivot until the end of 2023.
But it's not all gloom and doom for the gold price. In our last article, we identified three new trends pointing to light at the end of a tunnel: investors bailing on US Treasuries; a shift in gold-buying from Western markets to Eastern/Asian; and the fact that we appear to be at a point in the “gold cycle" just before gold turns upward.
The gold cycle has been repeated several times over the past few decades, and we see a fundamental shift happening again, as global growth grinds to a halt and the Fed's tightening efforts fail, resulting in recession. History tells us that gold does well during economic downturns and particularly in stagflationary environments.
For these reasons, and others, we are supportive of gold going forward. The “others" include the following:
This is confirmed in the chart below by the World Gold Council.
I see us going into a rising gold price environment and historically the greatest leverage to an increasing gold price is a quality junior. Below are three gold exploration companies I've been following closely. If you agree with my thesis that we are about to undergo a fundamental shift in the gold cycle, I recommend you take a close look at them.
RooGold (CSE:ROO) (OTC PINK:JNCCF) (Frankfurt:5VHA) has been making remarkable progress on its New South Wales, Australia properties, delivering sample after sample of high-grade gold.
The company has identified three very good prospects in Gold Star, Lorne and Arthurs Seat, all of which have delivered high-grade rock chip sample assays. And they've only just scratched the surface.
At Arthurs Seat, very little historical work has been done at the Murrays and Co Mine; the gold assays are the first to be reported from there. At Lorne, the field team has identified numerous other highly prospective gold targets covering a further 10-km strike distance. And at Gold Star, there are several highly prospective gold targets that the field team is looking to sample as soon as surface access is available.
RooGold commands a portfolio of 14 gold and silver concessions that span 2,696 square kilometers. The district-scale property is home to 139 historical mines and prospects. Yet despite its massive size, only 28 historical holes have been drilled across the entire land position.
That kind of upside doesn't come along often in a gold junior. I like how RooGold is approaching its field program, by going out and sampling historical mines and prospects, with an eye to working up high-priority exploration targets.