Gold falls today on the typical month-end selling. But if there’s one thing we’ve learned over the past few months, it’s that these are buying opportunities.

March 28, 2022

Dear Fellow Investor,

After ending last week on a tear with three positive days, gold has lost about $20 of those gains today in a typical month-end selling spree.

We’ve seen similar price slams over the past few months as shorts attempt to move the market in their favor directly ahead of options expiries, and in each case, it’s turned out to be a lucrative buying opportunity.

I think this dip is just the latest such opportunity.

Consider that we’ve already established a clear (and expected) uptrend after the Fed’s initial rate hike a couple of weeks ago. Much like their initial rate increase in December of 2015, I expect this one to mark months of rising gold prices.

Moreover, the primary risk that I’ve been concerned with seems to be abating.

As you know, I’ve been warning of a significant correction looming in the metals once there’s a resolution in the Russia-Ukraine crisis. At this point, I think the market has discounted an end to the crisis, not so much on the headlines as on the assumption that a resolution is binary: Either it ends with Russia retaining Crimea and one or two of the breakaway regions, or it ends with a nuclear war.

In the latter case, it doesn’t matter what you bought in advance, outside of iodide pills, canned goods and the four metals of gold, silver and copper-jacketed lead.

The market has, in my view, rightly assumed the former case and has largely bought and sold whatever it was going to in advance. So while I do expect some selling in gold and silver once peace breaks out, I don’t think the setback will be quite as dramatic.

For one thing, the metals have made tremendous progress on the charts. Since the latest move higher after the Fed’s initial rate hike, there’s clear sailing ahead. Sure, there’s some upside resistance at the $1,975 and $1,990 levels, but the $2,000 target will be a magnet.

Important to remember that these “big numbers” usually take at least a few tries (and often many tries) to get through, as you can see in the chart below.

Note how many attempts it took gold to clear the $1,700, $1,800, $1,900 and, yes, $2,000 levels. So clearly the next hurdle likely won’t be the last time gold bounces around $2,000.

But the difference now is that not only has the technical picture cleaned up considerably, we also have the powerful fundamentals of inflation and the Fed’s doomed battle against it to support the gold uptrend.

From a technical aspect, note how the two previous instances of a “golden cross” (with the 50-day moving average rising through the 200-day MA) were false signals because at least one of the moving averages was falling. In contrast, the last golden cross in February occurred when both MAs were rising. This is a much more solid indicator.

And while I abhor geopolitics as a driver for gold, it seems that the current crisis may spawn a more-fundamental run in gold.

It all has to do with the growing calls for sanctions on Russia’s gold reserves. I was asked for my comments on this development by MarketWatch last week, and they included much more of my views in the final story than I’d thought they would feel comfortable with.

For your edification, here’s what I had emailed them in full:

Any U.S. sanctions on Russia’s gold reserves would do little more than reveal the degree to which government bureaucrats don’t understand gold. The beauty of gold, unlike currencies, is that it is an untrackable store of value that has no counter-party. At least in smaller amounts, Russia could easily sell gold on the open market. In bulk quantities, it could just as easily sell the gold to China with no record of the transaction. In fact, that would seem a very likely outlet, as China has demonstrated that it is an eager buyer of gold and has kept the size of its gold reserves a closely guarded secret.

The end result of such sanctions would be to alert the 36 countries who hold significant portions of their gold reserves in the vaults of the New York Federal Reserve that they should take their gold back as soon as possible.

And that could create significant turmoil in the gold market, since there the Fed has demonstrated difficulty in actually finding and transporting the gold held for other nations. The bank famously told Germany that it would take seven years to repatriate just a portion of their holdings. It ended up taking only four years, but the episode raised credible doubts that all of the claimed national gold reserves are actually at hand in the Federal Reserve vaults.

In short, the U.S. should think twice before placing sanctions on Russia’s gold reserves.

In the short term, it could depress the gold price if Russia is able to sell a significant portion of its reserves. If, for instance, they were able to make arrangements to sell a significant percentage of their gold to China (likely at a discount), then that would depress China’s gold buying for some time.

Longer term, when other nations start requesting their gold back from the Federal Reserve vaults, it would send the U.S. scrambling to find gold to fill those requests, assuming that gold wasn’t readily available in the vaults. This could create enormous new demand in the global gold market and be a big factor in driving the price higher.

In general, the global gold reserve “business” is based on the idea that the gold holdings are essentially immobile. There’s a lot of evidence that much of this gold has been leased out to institutions over the past few decades, with those institutions then selling the gold into the market and paying minimal interest on the gold debt. So any call on those reserves would create massive short-covering all down the chain, and send the gold price rising precipitously.

In other words, this is a new factor emerging that bears close watching.

Otherwise, the metals now have the wind behind them. While there will be setbacks, I think $2,000 and much higher prices are just ahead. And that means we’ll want to keep positioned in the best of the junior mining stocks.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference