It happened, just as expected: Yellen raised rates and gold immediately got its groove back.
In the space of five hours gold gained as much as $24.50 and closed the day up $21.10 or 1.76% at $1,219.70 per oz. And the miners demonstrated the leverage we so love:
Money poured into paper gold as well. Over the last month, as gold lost ground in the lead up to the rate event, much was made of outflows from GLD, the gold ETF. And yes, in the month up to yesterday GLD logged outflows of $221 million.
Today alone reversed that loss, with $263 million flowing into GLD.
The dollar index also performed right on cue, losing an entire point following news of the rate hike. If that doesn’t confirm the theory that traders act before the news, I don’t know what does!
One afternoon of trading does not a pattern make, but today’s moves increase my confidence that we’re set up nicely for a spring gold run. I won’t belabor this point, since I talked it through in the last two letters, but I did want to include some charts that
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The most common question that arises around big mining conferences is the mood. And I understand why it gets asked: the mood does change year to year.
The scientist in me struggles a bit to answer, though, because mood is not quantifiable!
My struggles aside, the mood was good. Last year I would have described it as timid optimism. This year it is active optimism, and very active at that.
Exploration companies are figuring out how to speed up progress. There is widespread agreement that we are in a bull market and that the best way to capitalize on that is to get busy. Capital is still limited (more on that in a moment) but one clear marker of the new bull market is that significant capital has arrived for some.
Those some are the companies that attracted interest from private equity (for example, Appian Capital investing $25 million in small Ontario explorer Harte Gold), active sector investors (from the Eric Sprotts to the whole crew of less famous but very active high net worth individuals who like this sector), resource-focused funds (Van Eck and Sprott and the like), brokers and bankers who collectively get behind a raise, or
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Zinc demand is rising. Demand rose 2.7% in 2016 and is expected to rise 3.8% this year and 3.7% next year.
Meanwhile, refined zinc production (i.e. metal coming from smelters) fell 0.4% last year while mine production dropped 6.7%. A few mine startups and restarts this year and next should allow for positive growth in refined zinc over the next few years, but growth will be modest and is susceptible to challenges, like lower-than-expected Chinese mine production growth.
All told, it means a market in deficit for the next four years. The deficit means stockpiles will continue to get drawn down. When stockpiles sink below critical levels, the price reliably responds.
That critical level is usually six week of global consumption. Global inventories held 8.1 weeks of global consumption at the end of 2016, down from 9.3 weeks at the end of 2015. In the chart, you can see how the price surged in 2005 when inventories drop below critical levels.
Most zinc analysts have similar predictions to those shown above, in a chart borrowed from RBC Capital Markets (Zinc Metal Outlook – First Quarter 2017). As you can see, inventories fall below critical levels next year. Prices
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Snipped from the January 11th Maven Letter:
Gold has started out 2017 with a bang. The yellow metal is up 5.5% since Christmas. And gold equities are offering serious leverage: the GDX index of major gold miners is up 17.1% and its little sister, the GDXJ, is up 27%.
Base metal equities are also enjoying leverage: the TSX Global Base Metals Index is up 19% over the same timeframe, despite copper being up only 3.6% and zinc having gained only 4.5%.
Can it continue? That question breaks down into two parts: short term and long term.
In the short term, the gold run probably still has legs. Seasonality is still working for the yellow metal. We’re edging up on Chinese New Year and that always lifts gold demand in Asia notably. The US dollar hasn’t moved up in a month and it seems to me that, with inauguration day imminent, the market has reached the what-will-he-actually-do stage of the Trump honeymoon. Further dollar gains may well require reason, rather than sentiment. US stocks similarly have not made upward progress in a month and investors are probably wait-and-seeing for the same general reason.
However, there is one piece of evidence
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Happy Monday all. This week I’m sending out the editorial I wrote after spending two weeks in Colombia. It was a very interesting trip and left me enamoured of Colombia’s geologic potential, in awe of Colombian’s optimism and fortitude following 50 years of war, and believing that Colombia will be a mining country…but pretty cautious about investing in the country today. Only projects in workable parts of the country being advanced by teams that really understand the situation will succeed, and that is a short list.
Of course this week is all about the Federal Reserve’s meeting. I expect a rate hike and, since it is already completely priced in, I don’t expect much market reaction. In fact, I expect gold to start gaining once this event is over. January through March are reliably the strongest months of the year for the yellow metal, the sector is oversold, the strong US dollar is weighing in US multinationals, and the Trump honeymoon cannot last much longer without reason, which will be difficult to produce with any speed because politics are slow and economic benefits from political changes are even slower.
Next Monday I’m sure I will be sending out a
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Just home from two weeks in Colombia. An amazing trip.
I certainly paid attention to things while away, which means I tried to focus on coffee farms and art museums while gold slid below $1200/oz…and then below $1180/oz…
Is this decline ideal? Course not. Does it make sense? In its own ways, yes.
Most importantly: is the gold bull market still intact?
Yes. The trajectory has certainly changed since Trump’s win and there remains risk of continued weakness in the near term, but the fundamentals still support gold.
Rates, Returns, the Dollar, and Gold
I’m sure most of you have, like me, spent too much time reading and thinking about this issue in recent weeks. The first half of the year was so fun, so rewarding, with all the arguments for gold proving true. It is much less fun now seeing gains erode, seeing gold break down through technical barriers, seeing the US dollar rise and rise, and seeing US equities maintain a seemingly endless bull run that has become its own ‘safe haven’ for investment dollars.
My thoughts on gold have not changed much since two weeks ago, when the editorial titled Now versus
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Everyone is trying to figure out what Trump means, for stocks, gold, immigrants, trade deals, international relations, taxes, regulations, rates, the Supreme Court, racial tension, and most other things that matter in America. Last weekend’s Metals Investor Forum was no exception.
Trump was the topic on everyone’s lips. The discussions helped inform and advance my outlook, though I’m the first to say that it’s still far too early in this change to be certain about much.
Long term, the bull argument for gold remains very strong, grounded in negative real rates. Real rates, calculated by subtracting inflation from nominal rates, are the interest rates we actually feel. Right now nominal rates are extremely low at 0.4% Inflation is also low, but at something like 1.5% it puts the real rate of interest in America into negative territory.
That was the driving force behind gold’s gain this year. Yes, in discussion people usually focus on gold’s value relative to stocks or its cyclicality or its security in a world of debt or its safe haven-ness in a world of political and economy uncertainty, but these arguments only make sense in a negative real rate environment.
Negative real rates mean you
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Last week’s Maven Letter had two portfolio suggestions. I recommended buying a gold explorer that just got drills turning on a never-before-drilled target that offers all kinds of prospective evidence. Then I suggested selling a small miner that has outperformed expectations and its peers, but where signs of changing momentum meant it was time to take our 300% gains and move on.
The editorial, included below, looked at the fear that pushed gold up through US$1,300 per oz. and the reasons why gold will likely fall back again before resuming its rally.
I hope you had a good Monday!
Rising on Fear (from Nov 2nd, 2016)
Gold just broke back up through US$1,300 per oz. The metal’s strength over the last few days shows gold doing its usual duty: acting as a safe haven.
And the needs for safety are many:
- The US stock market is looking more set for a breakdown every day. Technical weakness is now apparent in market charts, such as the S&P 500 chart below. Key support was 2120 and we broke down through that yesterday.
- The yield curve looks to have bottomed and started upwards. We are seeing flat yields on short-term
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We all know what happened with gold over the past week: it jumped. Why? Pick a reason!
- North Korea testing a hydrogen bomb
- Various voting members of the Federal Reserve saying clearly that tightening is off the table in the near term
- Disappointing US jobs report
- Weakness in the US markets
- Declining US dollar
- Political dysfunction in Washington
- Gold breaking up through technical barriers
- Gold miners gaining while US markets slide
All those forces worked their magic:
That list of reasons explains the fundamental argument for gold. Broadly, I would summarize it by saying investors are gravitating to the safe haven of gold in the face of mounting geopolitical and economic uncertainty combined with a declining dollar.
Chartists don’t care much for fundamental arguments. They only look at charts. Often those working from fundamentals and those based in charts clash, but right now almost everyone is on the same page.
Looking at patterns, gold’s move up has pushed it past a few long-standing trendlines. One of those is the seven-year descending line from its price peak in 2010, which was set to collide soon with the long-term bull market line that started in 2006.
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The editorial below was published Saturday and looks at gold’s crazy gyrations on Friday. Fed Chair Janet Yellen said essentially nothing in her much-watched speech at Jackson Hole. Given that she uses such events to telegraph Fed moves, her silence spoke volumes – not being hawkish is the same as being dovish.
And a dovish Fed is the key event that will push gold higher, I conclude below. It will take time for the Fed to change direction though, and in the meantime all kinds of gold-bullish catalysts could easily crop up, as I conclude: “any number of Trump moves, debt ceiling fireworks, dovish suggestions from central banks, weak inflation or economic readings, terror events, or geopolitical turmoil.”
They’ve all happened of late and can easily happen again – and we saw exactly that today. Gold jumped 1.5% today to close well above $1,300 per oz. following Draghi’s lack of hawkishness, the US dollar not rebounding, and news late in the day of North Korea test-firing another missile, this time right over Japan.
Not just besting $1300 but getting markedly above it and staying there – it’s a very strong sign from gold. With summer winding down and traders
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