Big money traders and fund managers returned to their respective trading desks Tuesday from extended summer vacations. Collectively, more than $1 trillion in value exited the stock market on September 3, as recession fears entered the marketplace to begin what has historically been the worst month for equities.
Nearly a quarter of the entire U.S. market drawdown this week has come from a Nvidia meltdown which triggered the sell-off, placing significant pressure on leveraged investors to protect themselves from margin calls.
Stock market darling Nvidia was the focal point for a pullback to begin September, falling nearly 25% from its record high set in June and erasing $1 trillion in value alone. Now that the AI euphoria has started to fade, leveraged investors are in serious trouble and some can only escape by selling gold and raising cash to settle margin calls.
Yet, Gold Futures saw dip buyers come in quickly after testing the key $2500 level as recession fears were amplified by the fact that the inversion between the U.S. 2 and 10-year Treasury yields turned positive for the first time in two years. Historically, un-inversion has signaled the beginning of a recession.
Most market participants are familiar with an inverted yield curve being the predictor of recessions, with the track record being almost perfect over the past fifty years.
When a dis-inversion begins, which happened this week after the 2-year period of yield curve inversion, this is the key macro signal that has historically indicated weak growth ahead. This chart shows it's the dis-inversion investors should watch closely to signal the beginning of recession, not the initial inversion from Q1 2022 when the Fed began raising interest rates from zero.
Gold has increased in value during three out of four previous recessions. In some of the most painful recessions, gold has outperformed the stock market, including the 1979 recession, the dot.com crash of 2000-2002, and Black Monday in 1987.
Going into the Federal Reserve's blackout period next week, Gold Futures continue to hover above the key $2500 region with focus primarily on the size of the expected upcoming Fed rate cut later this month.
The U.S. Non-Farms Payroll (NFP) report released this morning showed jobs rising by 142,000 last month, according to the Bureau of Labor Statistics. The monthly figure missed consensus estimates of 164,000, while the unemployment rate dropped a tick lower to 4.2%, in line with expectations and down from July’s surprising rise to 4.3%.
As I type this column, traders are now pricing in a 59% probability of a 50 basis point cut instead of 25 basis points, per the CME FedWatch Tool.
In the short-term, Gold Futures have become extreme overbought monthly after multiple all-time highs on the back of an initial Fed rate cut expected on September 18, which is now fully priced in.
The central bank is broadly expected to lower its benchmark interest rate for the first time in more than four years. Therefore, we could experience a "sell the news" consolidation in September, which is a bad month for gold seasonally as well.
Further out, Gold Futures could approach the initial 13-year cup & handle technical breakout target of $3000 level by year-end, driven by a dovish Fed, continued geopolitical risks, and what is shaping up to be a U.S. presidential election result on November 5 that neither side will accept.
While the stock market is showing signs of a more serious correction, gold continues to shine as geopolitical risks such as the Israel-Hamas war and Russia-Ukraine conflict, along with exponentially rising U.S. government debt and a chaotic presidential election, have also buoyed prices.
There is also the elephant in the room keeping the gold price well bid that neither candidate has mentioned. The massive U.S. federal debt, which is now $35.3 trillion, and the highest federal government debt in the world. Total U.S. debt (governments, corporations, households) is $101.7 trillion, which is almost one-third of all global debt.
Lower interest rates the market has been cheering will help lower interest payments. But it does nothing to lower the actual debt, which rises $2.6 billion each day and is estimated to reach $46.8 trillion by 2028.
Meanwhile, record-breaking prices for the precious metal have also begun to fuel mergers, acquisitions, and expansions. In mid-August, global miner Gold Field’s (GFI) announced that it is buying Canada’s Osisko Mining (OSK.TO) in a deal valued at US$1.6 billion.
The all-cash offer was followed this week by major silver miner First Majestic Silver (AG) announcing that it is buying fellow Canadian explorer and developer Gatos Silver (GATO) in an all-share transaction valued at US$970 million.
Next week, I will be attending the Beaver Creek Precious Metal’s Summit in Colorado, which is followed directly by the Denver Gold Forum. After junior and major miner movers and shakers have met to discuss potential deals in the mining space, we are likely to see more takeover offers announced on the heels of both industry-only affairs.
In the meantime, gold mining sector bellwether Newmont (NEM) has been quietly outperforming the S&P 500 since the gold price broke out of its 13-year cup and handle pattern to begin Q2. But generalists continue to ignore the mining sector.
But that could be about to change. It’s not very often that any market produces a 13-year breakout like we recently experienced in gold, let alone a 45-year one we are close to experiencing in the inflation adjusted gold price at roughly $2700.
The gold price, when adjusted by the CPI in this chart, has broken above the trendline joining the 1980, 2011, and 2020 peaks after last Friday's monthly close above $2500.
This is a huge barrier of former resistance that has now been overcome. Provided Gold Futures eventually rise above $2700, and there are few technical grounds for suspecting otherwise, the CPI inflation adjusted gold price breakout has huge implications, not just for gold but for margins of gold miners.
With the bullion price rising faster than costs since the March 2024 breakout above $2100, mining margins have already improved significantly. And positioning gold against a future stream of rising earnings is an investment in the sector generalists have yet to discover as they continue to chase overvalued equities.
Also deflated by the CPI, consider the CRB commodities index being a proxy for mining costs. The Gold/CRB Index set a key low at 5.6 double-bottom in October 2022, and rose to 9.3 earlier in August for an increase of 65%. Energy costs are represented by Gold/WTIC and indicate that fuel costs, which can account for up to 60% of miners' cost base, have dropped significantly.
While gold prices are soaring from one record high to the next, most gold mining stocks are still far from all-time highs. The HUI would need to more than double from it's September 2011 peak at 638, when the gold price traded well below $2000, to reach a new record high.
Only select top global gold miners such as Agnico Eagle (AEM), and large-cap royalty/streamers like Wheaton Precious Metals (WPM), have managed to outperform the weak mining sector performance to reach all-time highs with the gold price.
However, after a breakout over the important downtrend line of the past 14 years, the strongly lagging junior miner GDXJ has indicated a breakthrough above downtrend line resistance on this chart and shows support at $40.
This former multi-year resistance level has become strong support and may be tested during this stock market correction. As we have seen in the lead-ups to previous recession downturns, equities are often not spared from liquidation event selling, and higher-risk junior precious metal’s equities even more so.
That said, the gold complex tends to outperform most other asset classes and is often one of the first movers after the Fed begins to cut interest rates (see 2001-2003, 2009-2011, 2020).
During previous cyclical lows in the mining space, large-cap majors and royalty/streamers recover first, followed by mid-tier producers, and eventually investors move down to the higher-risk juniors.
Over the past few years, the Junior Miner Junky real-money portfolio has been accumulating shares in several late-stage developer take-over candidates with 3x-10x upside potential from severely depressed levels. Although some of these stocks have been outperforming the sector recently, there is still plenty of upside remaining as risk is now firmly to the upside in the quality issues.
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.
