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Precious Metals
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General Precious Metals
Gold - Time to Buy or Sell?
What a difference a few months make. Gold/gold stocks have been coming down since the summer and even harder since Trump was elected. The exact opposite reaction of what everyone thought would happen. It doesn’t make sense since Trump highlighted infrastructure spending in his victory speech. The US is broke so where will Trump get all the money to re-build America’s infrastructure? He will have to borrow and print, which is inflationary and should be good for gold and bad for the USD. I believe the market is ignoring that for now and focusing on the FED raising rates in a couple weeks. The market is pricing in a 100% chance the FED will raise rates, which should explain the current strength in the USD and weakness in gold.
Regardless of the news, it is not out of the ordinary to have such a pullback in gold/gold stocks after the strong rally we had earlier this year. Resource stocks, especially precious metals, are very volatile. This market action is par for the course, regardless of the fundamentals. If we truly are in a new bull market, then we will have higher lows on each pull back like this. I believe we are at one of those higher lows right now. Gold and silver are hanging out at a major level of support (see charts below) and I am betting they will hold. People are starting to get bearish again and relieve the nightmares of the bear market. It was painful for many and they don’t want to repeat it. They want to sell or are reluctant to buy in case prices go lower. Gold/gold stocks are climbing the wall of worry. It would be nice to see the precious metals hold this level for a few more weeks or a month to give me more confidence in saying this level will hold, but I am getting a lot of people asking me what to do right now. In short, I would buy.
Many believe if gold goes any lower, stop losses will be triggered, and we could see $1000/oz very quickly, maybe even lower. Enough people are talking about it that it could become a self-fulfilling prophecy. If so, then mining stocks should get hammered in that scenario. What could cause gold to go lower? A rise in the USD. Look at the USD chart below. The USD has broken out of its multi-month trend line and has just broke out of its multi-year resistance.
Traditionally a strong USD has meant a weak gold price. However I am not so sure this relationship will stay true going forward. The current strength in the USD isn’t due to its great fundamentals. The strength comes from it being relatively less bad than all the other currencies in the world. For example, negative interest rates in Europe are forcing Europeans out of the Euro and into the dollar. This flow of capital should also spill over into gold buying too. Negative interest rates also mean the storage costs of gold suddenly become reasonable. It is interesting to note that we at Sprott are receiving more inquiries from European institutions about investing in gold and gold stocks for this reason. Therefore I believe it is entirely possible to see gold and the USD go up together. The correlation may not be perfect as the two markets try to shrug their historical relationship, but overall they could trend up together. So the breakout in the USD may not be the death knell for the gold price.
Looking forward on the fundamentals of the USD, debt continues to mount, and if Trump is true to his word on building out America’s infrastructure to be “second to none,” it would have to spark some kind of inflation. If his spending matches his ego, it could usher in another commodity bull market similar to the 2000’s when China was building out its infrastructure. This is why copper spiked so high in the last few weeks because speculators are clamoring to get positioned.
So, despite the current pullback in gold, the fundamentals for owning gold are better than ever. But what about the stocks? Well they are still near the cheapest they’ve been in 15 years. No one can pick a bottom, the best you can do is buy around one. All I can do for you is point out pullbacks that should be bought and pick stocks that will hold up better if my timing is wrong and lead the way up if my timing is right. This is one of those pullbacks to be buying.
I like looking at five year or ten year or longer charts. It really puts things in perspective. After all, to get the big returns that pundits promote in the resource sector, you have to be invested in it for five or ten years. It’s that simple. And when you step back and look at the long term charts of the gold miners and juniors (below), you can see how far we still have to go despite the rally in 2016. My favorite chart is the last one. It is the TSXV in USD terms. If you thought the rally this year was exciting, wait until we’re in a full blown bull market.
We won’t know for sure if January 2016 is the bottom of the current cycle until we look back on it. But at some point I have to call a bottom and I believe that was it. I’ve been recommending people hold 20-30% cash for the last few years in case we had a capitulation sell off. It did not occur so I’ve been waiting for the right time to put it to work. I believe the next few weeks is the time to do it. As I mentioned above, it would be nice to see the precious metals hold this level for a few more weeks to give me more confidence in saying this level will hold. But if you’ve been itching at buying this pullback, then go for it. Especially if you own PHYS or PSLV in your account then put your cash to work. Remember, gold and silver are money too so if I’m wrong and the market heads lower, it will create one heck of a buying opportunity, and we can sell your PHYS and PSLV to buy more stock.
At the bare minimum, this is definitely the time to be selling dogs and re-positioning into better quality stocks. If you haven’t made any changes to your portfolio in the last couple years, chances are you are not positioned to benefit from the next bull market and are still under water. I’ve noticed the clients that are staying on top of their portfolios, averaging down on dips, and been diligent in repositioning themselves, have their account value close to even or back to where it was in 2012. Whereas the indexes are still down 50% or more since then. Pruning your portfolio from time to time is no different than cleaning out dead fall and weeding a garden. A little bit of work here and there goes a long way to your investing success. If this is something you don’t have time for and want me to do for you, then we should discuss switching over to a managed account where I can stay on top of it for you.
Since all my clients have unique goals and beliefs, it is always best to reach out to me to discuss your personal situation and I can advise you further.
Thank you,
Kenton Ralph Toews, P.Eng.
Financial Advisor
Carlsbad, CA 92008
1-760-683-6582 fax
ktoews@sprottglobal.com
Member SIPC/FINRA
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