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Getting ahead of the precious metals and commodities rebound

Commentaries & Views

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.

Source: Kitco

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. 

West to East gold migration

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.

The Great Stagflation 2.0 and gold

For these reasons, and others, we are supportive of gold going forward. The “others" include the following:

  • When weighed against other asset classes, gold has actually been one of the better performers of 2022. Gold has outperformed US bonds, foreign bonds, the S&P 500, foreign stocks, the NASDAQ, and US Treasury Inflation-Protected Securities (TIPS). The only things that have outperformed gold are commodities, especially oil and agricultural goods, and the US dollar.

This is confirmed in the chart below by the World Gold Council.

  • Soaring bond yields indicate that investors think the Fed will do whatever is necessary to bring down inflation, and will succeed, without crashing the economy. But, once the Fed can no longer deny that it's wrong about being able to control inflation, and that the economy is weaker than they think, it will go back to loose monetary policy, i.e., quantitative easing (good for gold).
  • Positioning in gold futures has turned net short again and this, historically, has not lasted long — often mean-reverting in subsequent weeks. At the same time, central bank demand for gold remains quite strong. The World Gold Council said central banks added 20 tons to their net gold holdings in August, making it the fifth straight month of additions. Finally, as recessionary and geopolitical risks increase, investors may shift to more defensive strategies, looking for high-quality liquid assets such as gold to reduce portfolio losses. Given these factors, the World Gold Council said it is optimistic that gold's headwinds may start to subside, but that supportive factors will remain, “thus encouraging demand for gold as a long-term investment hedge."
  • Global leading indicators are turning down, hard. The United States is already technically in recession, and China may not be far behind. Corporate profit margins are under downward pressure from a toxic mix of rising input costs and tepid demand.
  • Although nominal interest rates have been climbing since March, real rates remain negative because inflation is so high (3.25% – 8.3% = -5.05%). Historical charts prove that practically every time yields fall below the rate of inflation, i.e. they turn negative, gold goes up.
  • Real interest rates and gold

  • The yield curve has inverted 28 times since 1900, and in 22 of those times, a recession followed. The yield curve (the difference between the 2-year and the 10-year Treasuries) has been negative since July 8. On average historically, a recession occurs 11 months after the yield curve inverts, meaning we may not be far away from the Fed pivot that results in a tremendous upswing for gold.

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.

RooGold racking up high-grade rock chip sample assays in NSW

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.

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.