Gold Approaches Major BUY Zone (Chart of the Day 12)

Will This Time Be Different?

Precious metals have disappointed their fans and enthusiasts for YEARS.  After peaking at about $1900 per ounce in 2011, Gold is still 1/3 lower 8 years later.

The 2011 runup was the result of inflation fears from Quantitative Easing (QE) by the Federal Reserve.  QE was the program of massive monetary stimulus begun by the Fed following the financial panic of 2008-9.

The monetary expansion never resulted in the level of inflation that had been feared.  As a result, Gold, as well as other commodities, sank for the next several years.

GLD recently bottomed at $111 and closed Friday at $122, still only a modest rise from its lows.  It has been turned away by Multi-Year resistance at $130.   Will it be able to overcome this resistance and usher in a new bull market?

MEGA Gold Miner Mergers

In the last 6 months, the two largest miners have both entered into MAJOR acquisitions.  THAT IS DRAMATICALLY DIFFERENT.

Newmont Mining (NEM), the second largest producer, has recently announced the acquisition of Goldcorp (GG) for a cool $10 BILLION.  The combination of the two creates the LARGEST producer.  (https://www.cnbc.com/2019/01/14/newmont-to-buy-goldcorp-in-a-10-billion-all-stock-deal.html).

The Newmont deal follows the completion of American Barrick’s purchase of South African miner Randgold (GOLD) for $18 BILLION. The combination creates the largest holder of in-ground Gold deposits AND the lowest cost Gold producer. (https://www.forbes.com/sites/greatspeculations/2018/09/27/barrick-gold-randgold-merger-a-new-gold-mammoth-in-the-making/#3df3d838211e).

Two mergers of this size are clear indications of value backed by $28 Billion.  Barrick and Newmont’s purchases indicate that the most knowledgeable investors believe the sector is undervalued.  In addition, at current prices, it is more cost effective to purchase assets than explore for and develop them.

Production of Gold has stalled in recent years, because the price has remained “depressed” in relative terms.  As a result, many mines have become uneconomical causing production to remain stagnant at about 3000 Metric Tons.  The largest producer is China, accounting for 15% of the World total.  (https://www.statista.com/statistics/238414/global-gold-production-since-2005/).

Silver production has begun to fall in recent years.  Most silver is produced as a by-product of other metals, such as Zinc, Copper or Nickel.  (http://m.miningweekly.com/article/global-silver-output-falls-41-in-2017-as-industrial-demand-ramp-up-gfms-2018-04-12/rep_id:3861).

The cost of producing Silver is thought to be about $10.50 per ounce.  At its current price of about $15 per ounce, the margins for producing Silver are not conducive to increasing production or supply.   (https://www.americanbullion.com/what-is-the-current-cost-to-produce-an-ounce-of-silver-today/).

Gold Advances Against A Strong Dollar

Gold has been an excellent hedge AGAINST depreciation in the Dollar because it typically moves inversely to it.

When the Dollar is strong, it may be a sign of either Dis-Inflation of Deflation, and it is not conducive to rising precious metals prices.

Since last fall, Gold has pushed higher even while the Dollar has remained strong, a clear sign of internal strength.  Against other currencies, Gold has advanced even more.

If the Dollar weakens, it is entirely possible that Gold’s rise will accelerate higher with a tailwind behind it.

Miners And Silver Have NOT YET Confirmed Gold’s Rise

The price behavior of Gold, in many respects, continues to be enigmatic.  Some of the indicators giving contradictory messages were recently reviewed here:  “Precious Metals Puzzle (Charts of the Day 7)”.  (https://markonomics101.com/2018/12/27/precious-metals-puzzle-charts-of-the-day-7/).

Gold and Silver miners have yet to provide the type of confirmation that signals the odds of a large move ahead.  Ideally, the HUI index should  at least clear resistance at 170 and establish a well-defined uptrend.   Until then, the move remains suspect since the miners have lagged the metal.

The anemic move in miners is even more surprising in light of the acquisition activity in the sector.  Smaller independent operators are now  targets for other companies to create the economies of scale required to remain competitive.  The index ought to reflect this, yet does not.

Silver has also lagged behind Gold.   SLV remains well below resistance at $20.   At a minimum, SLV will need to break out above its DECLINING Trend Line at $16 to even begin to form an uptrend.   Silver is more volatile than Gold and usually experiences greater percentage moves in either direction.

Precious Metals Belong On Our “Watch List”

It’s too early to go “All In” on Gold or Silver at this point, but the purchases by Newmont Mining and American Barrick tilt the odds.   Acquisitions of this type, super mergers typically occur near either Major market tops or bottoms.

At tops, mega mergers are a contrarian sign of irrational exuberance.  At bottoms, they are a MULTI-BILLION commitment to VALUE.  Clearly, the latter is the case here.

Gold and Silver BULL Markets are spectacular and worth positioning for when the time is right.  Fundamentally, the TIME is right.  Technically, the TIME will be right when GLD clears 130 accompanied by the miners and Silver.

The best investment is always INFORMATION.  That’s where we come in.

Be Informed, Not Misled!

 

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