WPM - Gold Driven By Fear And Uncertainty In The Financial Markets

2023-04-02 08:31:20 ET

Summary

• The S&P 500 would appear to be rolling over so investors will be looking for an alternative for their investment funds.
• Most of us are facing cost increases right across the board so the Feds may be tempted to “pivot” at this juncture and revert to a policy of monetary easing.
• Despite high interest rates, the US Dollar continues to decline and inflation continues to decimate its buying power.
• Gold is showing considerable strength at the moment and is set to rally and make a new all-time high this year.
• Gold mining stocks are undervalued and should form at least a small part of every investor's portfolio.

Introduction

On days like this I feel a bit like the Weatherman dispensing his forecast:

Outlook; unsettled, changeable, stormy, high pressure moving in, occasional thunderstorms and that's just your mortgage costs.

Joking apart, the world is in a very restless state with civil unrest from the Ukraine to France. Our news stream is dominated by issues of migration, inflation, interest rate hikes, war, uneasy east/west relations etc. This all comes on the back of a pandemic which wreaked havoc on our health and left a trail of economic destruction for us to deal with.

More immediate problems for the authorities are the recent failures in the banking sector such as Silicon Valley Bank, Signature Bank, Credit Suisse and others. This raises the question of how much contagion is there and who else has liquidity problems. In an Evening Briefing from Bloomberg they mentioned the cost of insurance as follows:

"The Federal Deposit Insurance Corp., facing almost $23 billion in costs from recent bank failures, is said to be considering steering a larger-than-usual portion of that burden to the nation's biggest banks. The agency has said it plans to propose a so-called special assessment on the industry in May to shore up a $128 billion deposit insurance fund that's set to take hits after the recent collapses of Silicon Valley Bank and Signature Bank."

We can see that the banking sector has problems, but as yet we don't how far they extend or how deep they will be. Some relaxation of monetary policy might be required via a halt to interest rate hikes or even a reduction in order to calm the markets. The Federal Reserve raised the funds rate by 0.25% to 4.75%-5% as indicated on the chart below during their March 2023 meeting.

Most of us are facing cost increases right across the board so the Feds may be tempted to "pivot" at this juncture and revert to a policy of monetary easing. I would expect the US Dollar to head south if a policy of interest rate reduction were to be implemented. In turn I would expect Gold which is showing considerable strength at the moment to rally to higher ground and hit a new all-time high this year.

However, the reader should be aware that I am a gold bug at heart and it is my preferred hard asset in times such as these.

One Year Chart Of Gold

A quick look at the gold chart shows us that gold has recently formed a double top. At this juncture gold could have failed to make progress which would have been seen as a negative indicator and gold could have been sold off during a bout of profit taking.

However gold has managed to get above the double top and provided it's not another false dawn could do well from here. On the downside the technical indicators such as the MACD are in the Overbought Zone suggesting that gold may well take a breather at this point.

I have been long physical gold and silver for many years and I am happy to continue to hold them as the outlook looks positive for them. However I am also long on gold and silver mining stocks and am puzzled as to why they are not attracting the investment funds that I think they deserve. In 2011 when gold traded above $1900/Oz the Gold Bugs Index (HUI) stood at 630, here in 2023 with gold trading above $1900/Oz this Index stands at 256, which is less than half of what it was in 2011. This aberration suggests that either gold is going to come clattering down or the mining stocks are about to catapult to much higher ground.

Now when I look at my own trading style, unlike my school reports, I tend to be 'in' too early as my portfolio includes but is not limited to: Sandstorm Gold Ltd. ( SAND ), Wheaton Precious Metals Corp. ( WPM ), Agnico Eagle Mines Ltd. ( AEM ) and SSR Mining Inc. ( SSRM ).

The performance of these four stocks over the last six months is varied for a myriad of reasons, however in general given gold's current strength they should be trading at much higher levels.

A number of these mining stocks are now paying a dividend such as Agnico-Eagle Mines Limited which has an annual dividend yield of 3.14% with a $0.40 quarterly dividend. So the dividend is not too shabby, and the possibility of a capital gain should appeal to the investment community

One Year Chart Of US Dollar

A quick look at the chart of the US dollar and we can see that it's dropped from 114 to 102 in six months. Should interest rates be reduced the US dollar could easily trade below the 100 level.

One Year Chart Of S&P 500

Since the beginning of 2022, the S&P 500 has fallen from 4800 to around 4000 today. This decline has been punctuated by wild oscillations in both directions. This decline can be attributed in some part to inflation, the increased cost of finance and the possibility of a severe recession. Given that the outlook is not very bright then some investors may be looking at alternative market sectors to invest in and the precious metal sector could be one of them.

Conclusion

The S&P500 would appear to be rolling over so investors will be looking for an alternative for their investment funds.

Inflation is remains stubbornly high and could be with us for some time to come.

Despite high interest rates the US Dollar continues to decline and inflation continues to decimate its buying power.

The cost of borrowing money is high and could get higher in the short term igniting a sell-off in the financial markets.

Hard assets such as gold and silver are viewed by some as insurance against economic uncertainty and social unrest.

Gold mining stocks have been overlooked in my view and they deserve to be included, even as a small percentage of any investors portfolio.

Your comments are very much appreciated so please fire them in, and I will do my best to address each and every one of them.

Go gently as these are difficult times.

For further details see: