Dear Fellow Investor,
Gold popped — and stocks dropped — yesterday when President Trump, attending a NATO summit in London, suggested that it might be best to wait until after the presidential election to finalize a trade deal with China.
At its highs, gold was up about $20, while at their lows, the major stock indices had lost about 1.5%. The Dow was down as much as 450 points at one time.
Today, those roles are reversed, not unexpectedly, as gold is down a few dollars and the U.S. stock market is rallying after rumors of progress in the China trade talks were conveniently leaked.
But have no fear; I didn’t expect a sustained gold rally. At least not yet.
I’ve maintained that gold, and gold shares, would trade sideways-to-down through mid-month, and were likely thereafter to begin a new rally once seasonal and tax-selling pressures were alleviated. That’s been a fairly consistent pattern in the sector over the years, with a new year rally actually beginning a week or two earlier in the previous year.
These rallies can sometimes double or triple the prices of price-depressed, resource-rich companies. It’s no guarantee, but the pattern repeats with enough regularity to consider this an annual opportunity for investors to lower risk in an otherwise very risky sector while also getting exceptional upside potential.
From a larger perspective, it’s not surprising that Trump provided the spark for a situation that I’ve thought was inevitable — that being a significant stock-market sell-off.
After Chairman Jerome Powell’s recent statements that the Fed was done with rate cuts unless there was a “material reassessment” of their outlook for the economy, I predicted that the stock market would at some point throw another hissy fit to prompt more cuts.
In other words, Powell and the FOMC had set themselves up for a massive communications failure. We all know that the stock market doesn’t want easy money as much as it wants ever-easier money. It looks ahead to price in further rate policy, and if it doesn’t see more cuts ahead, it prices in lower values.
That is to say, the stock market (which at this point has become the U.S. economy) will fall if it doesn’t get the monetary adrenaline it craves. And it will throw a hissy fit, a major sell-off, to deliver that message to the Fed if necessary.
We may have gotten a preview of that yesterday.
Regardless, it’s only a matter of time in my opinion before the Fed knuckles under with more rate cuts. And because they’ve already set the standard that it would take a “material reassessment” of their outlook before they’d cut again, the message to the market at that point would be extremely pessimistic, regardless of the underlying facts.
Adding fuel to the fire, the Fed is now telling us that it will move toward a “symmetric” inflation target, wherein a period of unduly low inflation (like we have supposedly been experiencing for years) will be countered by a period in which inflation rates higher than the 2% target are tolerated by the Fed.
So if we’ve been living under 1.5% inflation as the Fed maintains, then it will allow 2.5% inflation for a lengthy period to compensate.
This is an extraordinarily dovish shift for the Fed. One can envision the Fed setting a symmetric target of 2.5% inflation, then allowing an overshoot to 3% to juice things up a bit more...and then hoping to keep control of a Genie that only has one foot left in the bottle.
Good luck with that.
In the meantime, things are looking up for gold mining stocks. And that’s not only because of today’s price action, but also because the corporate mergers-and-acquisitions action is heating up.
In recent days we’ve seen the sale of the Red Lake gold mine complex by Newmont to Australian miner Evolution Mining, a bid for Detour Gold from Kirkland Lake Gold, an agreement for China’s Zijin Mining to acquire Continental Gold, Kinross selling its royalty portfolio to Maverix Metals, Barrick Gold selling its 50% interest in the Super Pit Mine and a hostile offer by Endeavour Mining for London-listed Centamin.
It seems as if the long-awaited M&A frenzy is here.
As you can see, the feeding frenzy, such as it is, is more along the lines of producers gobbling up other producers. This is just what you would expect in the early stages of such a trend.
At some point we can expect the producers to look further down the food chain, and further out in the production pipeline, to juniors with large, established resources. This adds more potential fuel to our strategy of buying resource-rich juniors at this low point of the cycle.
Last week, I gave Gold Newsletter subscribers a “mini-portfolio” of junior companies that boast large-scale gold and/or silver resources — companies that I feel are therefore particularly well positioned to take advantage of a new year gold run.
I don’t usually give out stock recommendations in Golden Opportunities, but my mini-portfolio has already been leaked out by the press...so I want to make sure you have it as well.
Here are the resource-rich companies I’m recommending for this next potential gold rally: Bluestone Resources (BSR.V), First Mining Gold (FF.TO), GoldMining Inc. (GOLD.V), Northern Dynasty (NDM.TO), Pure Gold Mining (PGM.V), Revival Gold (RVG.V), Sabina Gold & Silver (SBB.TO) and Silvercorp Metals (SVM.TO).
Further down the line, if/when the M&A trend continues, we’ll see the majors devoting more funds to exploration joint-ventures, which will help our favorite companies at the lowest rungs of the food chain.
If you’d like to keep track of my current recommendations and all my new discoveries, this window of opportunity in the junior mining share market marks a great time to subscribe to Gold Newsletter. Just CLICK HERE to subscribe.
All the best,
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Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
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