Gold and silver prices have been on a roller coaster over the past 3.5 years as prices have responded to the changing political and economic environment. With the U.S. dollar posting its worst performance since 2020 against a basket of major currencies, Gold Futures ended 2023 with a nearly 14% gain, while silver ended the year basically flat.
Despite challenges such as surging bond yields and a robust U.S. dollar to begin 2023, which accounted for the lag in silver, gold prices demonstrated resilience throughout the year. Notably, in the face of the Federal Reserve's decision to raise interest rates to a 22-year high.
The two most significant events for gold demand in 2023 were the collapse of Silicon Valley Bank and the Hamas attack on Israel, which led to central banks buying record amounts of physical gold. Through the third quarter, central banks year-to-date bought 800 metric tons of gold, which is 14% higher than in the same period a year ago.
The People's Bank of China has continued to purchase gold, and as of the end of November 2023, China's gold reserves reached 2,226 tons, an increase of 12 tons (0.53%) from the previous month. This marks 13 consecutive months of gold accumulation, while they will likely continue the de-dollarization-based buying of bullion next year as U.S./China relations continue to sour.
Wan Zhe, a professor at Beijing Normal University and former Chief Economist of China Gold Group, stated that central banks are the "weathervane" of the market. Their continuous gold purchases also indicate that the current market's risk aversion sentiment and tense situation have not fully eased due to geopolitical influences, among other factors.
The latest central bank gold reserve survey by the WGC shows that considering inflation, geopolitical events, and other factors, 70% of the surveyed central banks expect to increase their gold reserves in the next twelve months, and this trend of central banks buying gold may continue for several years.
2023 was also the worst year for banks since 2008, and JPMorgan’s CEO Jamie Dimon says we can except more to come soon from all of the defaults piling into banks from commercial real estate. Moody’s lowered its ratings outlook on Treasuries last month, citing high levels of government debt and deficits coupled with political brinkmanship in Washington that could jeopardize the global standing of government-issued fixed income.
Back in 2011, Standard and Poor removed the U.S. government from its list of risk-free borrowers for the first time after months of political brinkmanship over the nation’s debt ceiling. Moody's negative outlook has made it more likely that the world's largest economy is on the way to losing its last AAA rating.
A key shift in the gold complex came in mid-December when the Federal Reserve Open Market Committee (FOMC) indicated the possibility of at least three interest rate cuts in 2024. The stark shift in the Fed outlook, with 17 of 19 policymakers seeing rates lower by the end of 2024, fueled Wall Street bets of rate cuts as early as March. According to the CME FedWatch Tool at year-end, Fed-funds futures traders have priced in a roughly 87% chance the Fed will have delivered a rate cut by its March meeting.
Moreover, the Fed’s “dot plot,” which reflects individual members’ expectations, suggested the potential for four rate cuts in 2025 and three more in 2026, bringing the rate down to between 2% and 2.25%. This surprise announcement of a timeline to the long-awaited
Fed pivot has led to the market beginning to create a new floor at the key $2000 level in Gold Futures, which has been strong overhead resistance for 12.5 years.
With the stock market pricing in a soft landing, while inflation remains well above its 2% target, what caused the Fed to surprise the marketplace by signaling an end to rate-hikes sooner-than-expected? A likely answer is the world's most powerful central bank is preparing the economy for an inevitable stagflationary recession that inverted bond yields have been predicting over the past several months.
Judging by the Fed's recent actions, along with the recent cooling U.S. jobs data and rising consumer debt levels, the risk of a double-top being formed in the SPX will be in focus next week as the soft landing narrative may dissipate over the next six months.
Gold and the Fed could be sniffing out this scenario taking place early next year, which may lead to a substantial decline in a wildly overvalued stock market and a substantial rise in the USD gold price that is trading at much less euphoric all-time highs.
At the end of 2023, the soft landing narrative remains dominant after the S&P 500 rebounded to close the year near its previous all-time high set on January 3, 2022. The first week of trading during the new year is important for the U.S. stock market, which usually indicates what lies ahead for the entire year. After reaching an all-time high on the second trading day of 2022, a wildly overvalued SPX reversed sharply to end the year down 20%.
The main message the Fed signaled to the market with its recent surprise announcement of imminent rate-cuts is the only choice governments have to reduce their debt-to-GDP levels by boosting nominal growth through inflation and expansive monetary/fiscal policies.
Since this method to reduce debt to GDP is much more popular with voters than alternatives such as higher taxes, cuts to entitlements, depression, default, etc., gold and silver prices will likely continue moving even higher as two key factors become prominent - the decline in the U.S. dollar and governments’ attempt to address massive global debt levels.
Current U.S. debt to GDP at 133%, along with global trade imbalances, is signaling the U.S. dollar being chronically overvalued. If/when the U.S. economy does fall into a recession next year, the high value of the world's reserve currency is sure to become a prime topic of debate during the 2024 presidential election. Historically, in the last 120 years, 98% of countries where the debt-to-GDP ratio exceeded 130% have gone bankrupt!
The level of geopolitical uncertainty during 2024 is also expected to ramp up considerably as the governance of more than a quarter of the world's population will be at stake in elections next year. More than 2 billion people will be voting in 2024, beginning with Taiwan next month, Russia in March, India by May and the United States in November.
Taiwan holds presidential and parliamentary elections on Jan. 13, and the outcome could shape how Chinese President Xi Jinping pursues his goal of taking control of what Beijing considers "sacred" Chinese territory.
Meanwhile, the U.S. election is setting up to end with neither side accepting the official outcome after the last two were heavily contested by the losing side. Losing Democrat candidate Hilary Clinton cried
Russian interference in 2016, then losing incumbent President Donald Trump cried Deep State interference in 2020.
Furthermore, Democrats are attempting to make leading GOP candidate and former President Donald Trump ineligible to be re-elected, while House Republicans are attempting to impeach sitting President Joe Biden. Trump leads his rivals for the Republican presidential nomination by nearly 50 percentage points in national opinion polls and has a slight lead over Biden in opinion polls, even as he defends multiple criminal charges against him.
Considering all the above, investors’ need for portfolio hedges will likely be higher than normal in 2024. With growing global instability and an extreme overbought/overvalued U.S. stock market being priced for perfection, I expect Western generalists to begin looking at hedges that could prove worthy in riding out the coming storm - namely macro hedge funds, conservative growth funds, cash, and gold.
Cash does not earn enough to keep up with real core inflation, which destroys its purchasing power and value. And macro hedge funds/conservative growth funds aim for capital preservation, while returns can vary.
Yet, gold has been money for over 3,000 years. It is durable, divisible, consistent, convenient, and holds value as it has always been worth something. Gold is also indestructible and resilient. Gold is nobody’s liability, and If a currency collapses, gold maintains its value as a means of exchange.
Gold has historically performed well during periods of severe economic stress, geopolitical risks, and in periods of either inflation, deflation, or stagflation. The stagflationary 1970s is a prime example of when gold was a major performer, gaining almost 2,400% from 1970 to 1980.
For all the year-end cheer in general equities, the rally’s path ahead looks fraught with risk and uncertainty which is setting the table for the safe-haven metal to breakout from a 3.5 year base. Since 2000 there have been 8 years (one third of the 24) where Gold rose by one percent or more in the five sessions going into Christmas as it did last week. In the following year, Gold gained an avg. of 23.9%. All but one gained over 20% and even in the one outlier, 2017, the gain was 7%.
As we head into 2024, general equity sentiment is at bullish extremes after the Dow Jones, S&P 500, and Nasdaq ended 2023 at, or very near, all-time highs. Yet, gold stocks are at bearish extremes, having never been this cheap in relation to the gold price despite also trading at all-time highs.
With the 13-year bull market in stocks likely ending at some point in early 2024, while the precious metal's mining sector has created an accumulative 6-month rounded bottom, large fund managers will scale into the blue chips within the sector at first, then the mid-tier and junior miners, followed by the more speculative and higher-risk developer/explorers.
The difference between the gold mining complex and most other parts of the economy is that the biggest booms in this tiny sector (the periods when the bulk of the mal-investment occurs) generally coincide with busts in the broad economy, while the biggest busts in the gold mining sector (the periods when the ‘mal-investment chickens come home to roost’) generally coincide with booms in the broad economy.
The developed world, including the U.S. and much of Europe, are currently moving towards the bust phase of the economic cycle, meaning that we are heading into a multi-year period when a boom is likely in the gold mining sector.
Since I began to heavily invest in the gold complex in 2003, the mining sector has outperformed and also underperformed the gold price, often in major ways and in both directions. Obviously, during the past three years, the high-risk/high-reward junior space has underperformed both miners and the metals after their dramatic outperformance in 2020.
Although general equities and Gold Futures both closed 2023 at all-time highs, silver and precious metals stocks have lagged the gold price throughout most of the past three years as mining costs outpaced gains in bullion while the parabolic rise in Crypto, followed by A.I stocks, have kept generalists out of the mining sector altogether.
However, the recent cyclical underperformance of the mining complex created an opportunity for contrarian speculators to patiently accumulate a basket of high-quality juniors at low-risk entry points. For a glimpse of what may happen in 2024, with the gold price on the cusp of an historic breakout, consider mining sector performance during the previous two major gold breakouts over the past 20-years.
Once the gold price made a monthly close above $500 in late 2005, which was strong overhead resistance for the previous 12-years, the $HUI (both GDX & GDXJ were introduced in Q4 2009) doubled by late 2007. And once the gold price printed a monthly close above $1000 in mid-2009, the HUI doubled again by mid-2011.
I was fortunate to be the recipient of several 3x-10x gains in junior precious metal's stocks during both previous multiyear up-legs in the gold complex, which were generated by accumulating large positions during junior capitulation down-legs similar to the environment we have recently experienced. My largest gains came after accumulating large positions in two silver juniors (First Majestic and Silver Wheaton) in late 2008, which garnered 20x gain returns by mid-2011.
After being relentlessly sold down to 2016 levels in relation to the silver price earlier this month, junior silver stocks are possibly the most undervalued and best investment opportunity in 2024.
At the end of 2023, silver is 1/2 its all-time high from 1980, while gold is 2.5x its 1980 high. This 34-year chart shows how cheap silver is historically in relation to gold, and this chart shows SILJ possibly double-bottoming in relation to silver after reaching the uber-depressed 2016 low.
When the SILJ/Silver ratio was last at 0.30 during the second week of 2016, several junior stocks zoomed 5x-10x in just six months. At this time next year, we may look back on Q4 2023 as being the lowest risk entry point for contrarian speculators to accumulate holding positions in quality junior silver stocks for outsized gains into 2025.
With past being prologue (2005-2007 & 2009-2011) there will be a point at which major asset fund managers, who begin to perceive gold to be a safer place to be than other asset categories, start moving money into the gold stock complex after leaving the sector in 2012.
After the precious metals sector has been largely ignored by Wall Street over the past decade, I expect undervalued gold and silver miners, followed by quality juniors, to become attractive in 2024 as generalists look for a speculative alternative to overvalued equities.
Once the market begins to price in a solid gold floor at $2000, as opposed to being 12-year resistance similar to 2005 at $500, stock short-covering will increase along with value investor buying.
Long positions in major miners are already being taken by smart money players before a technical breakout in the gold price is confirmed with a monthly-basis close above $2100, which is evident by the huge volume in bellwether blue chip gold miner Newmont (NEM) since
its October low. The largest global gold miner has also broken above its downtrend resistance line from a 2022 all-time high reached in Q1 2022, when NEM was double its current price despite gold prices being currently higher.
In anticipation of the incredible gains the junior sector will begin to experience once the gold price prints a technical breakout above $2100, the Junior Miner Junky (JMJ) newsletter has accumulated a basket of quality juniors with 3x-10x upside potential into 2025-26.
If you require assistance in accumulating the best in breed precious metals related juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.
Wishing you and your family a safe, healthy, and prosperous Golden New Year!
