CA - Snowline Gold: Overbought Can Be A Signal To Take Profits

2023-07-11 13:59:01 ET

Summary

• Snowline Gold Corp has a Sell rating as the stock appears overbought and could fall significantly if the US Federal Reserve continues to hike interest rates.
• Shares could potentially create more attractive entry points as the Fed hikes rates and offer the opportunity to replenish holdings in anticipation of an expected gold bull market.
• A gold bull market may occur between late 2023 and 2024.

This article reiterates a Sell recommendation made in the previous article for Snowline Gold Corp. ( SNWGF ) (SGD:CA). In the previous article, the rating was supported by expectations of lower gold prices amid higher interest rates and an easing of the US regional banking crisis, affecting Snowline Gold Corp. shares as this Canadian prospector is very sensitive to changes in the price of gold. While the price of gold fell, Snowline Gold Corp. traded instead higher thanks to the announcement of the start of drilling and exploration campaigns in 2013. Nearly overbought, shares now threaten to take a significant pullback, and the lack of resilience in Snowline Gold Corp's portfolio of early exploration activities won't help the stock price withstand the next headwind of additional rate hikes from the US Federal Reserve.

A Sell Rating for Snowline Gold Corp

This article discusses Snowline Gold Corp. with a Sell recommendation rating as the stock appears to be overbought and has no margin to rise further. Instead, shares of SGD:CA could fall significantly if the US Federal Reserve continues to raise rates against the elevated core inflation. Higher interest rates are enemies of the price of gold and gold-backed securities. The stock may be offered at a convenient entry point after the hawkish policy, creating an opportunity to increase exposure in a likely gold bull market to take place sometime from late 2023 through 2024.

Gold Price Outlook: Why a Recession Could Trigger a Gold Bull Market

The price of a troy ounce of gold traded through Gold Futures expiring Aug. 23 (GCQ3) is $1,929.05 at the time of writing, down 7.5% from its three-year high of $2,085.40 on May 4, 2023, and losing some of the gain set aside during last March's rally in response to headwinds from the US regional banking crisis.

The growing likelihood of another rate hike by the US Federal Reserve in a bid to curb elevated core inflation is behind the precious metal's recent fall in price.

Currently, there is a 92.4% chance that the Federal Reserve will hike interest rates by another 25 basis points with the decision of July 26, 2023, and that should not bode well for those who are bullish on the precious metal's price. When interest rates rise, fixed-income securities like bonds are even better placed to compete with non-yielding gold. Fixed-income securities can trigger a significantly greater demand for the precious metal.

The late July rate hike could be followed by others as core inflation excluding more volatile goods and services remains too high despite strong downward pressure from monetary tightening and tightened requirements for access to credit following multiple bank failures in March and May last year.

The Fed is indeed monitoring the economy at the moment, but it is clear that it will not consider changing policy for the time being, at least until it is certain that inflation is on track to return to the medium-term target of 2%. Macroeconomic trends are currently insufficient to give the Fed that certainty. And that is simply because robust labor market conditions continue to spur consumption, the main driver of higher prices, as consumption accounts for over 70% of the gross domestic product. Jobless claims below historical averages and job vacancies above pre-pandemic levels continue to point to a very stubborn labor market, as also revealed by the June 14 FOMC minutes .

This factor will be an economic recession, contrary to those who believe it will not happen as the central bank will be able to stabilize prices without triggering a recession (so-called soft landing of the economy). This analysis assumes that the recession will take place between late 2023 and 2024, and it is also unlikely to be minor.

This analysis considers an economic recession to be very likely for the following reasons:

• First, the Fed's policy of tightening interest rates, aimed at containing inflation by restraining consumption, is fairly aggressive and consisted of ten consecutive hikes averaging 50 basis points per hike until the June 14 pause.
• Second, not all increases were transferred to the economic system, since the savings accumulated by households during the crisis pandemic - remember the checks paid out as compensation for incapacity to work during the restrictions against the Covid-19 virus - acted as a buffer. Once these excess savings are used up, consumption is likely to fall significantly, and the situation seems to be in sight due to a gloomier assessment of excess savings.
• Third, core inflation, which excludes highly volatile commodities such as food and energy, is still too far from the medium-term target. Inflation is a very good indicator of what has not happened yet. There is no doubt that inflation has come down incredibly, declining from an all-time high of 9.1% in June 2022 to 4% in May 2023. But it is also true that a very large part of the decline is due to energy commodity prices returning to pre-pandemic levels from their all-time highs. Crude oil is down 44% from its March 2022 high of $130.5 per barrel, while natural gas is down 73.5% from its August 2022 high of $9,987 per MMBtu. While the prices of core goods and services, which serve as the basis for the Fed's monetary policy, fell only slightly .
• Fourth, other increases in interest rates are planned that will be necessary to curb inflation.

As gold acts as a safe haven against the side effects of the recession, it will likely be in high demand to protect the value of assets in the portfolio. Its price is likely to trade well above current levels and the bull market will trigger a price surge in gold-backed securities, including Snowline Gold Corp. stock ((SGD:CA)).

Don't Be Fooled by the Recent Trend. Snowline Gold Corp. Tracks the Price of Gold

Based on the chart below, which indicates the existence of a strong positive correlation between the price of gold - represented by Gold Futures - and the price of the SGD:CA stock, the shares of the Vancouver-based Canadian gold prospector should be on the uptrend, as sentiment returns to bullishness for the precious metal.

The reader may be misled by the negative value [-0.59] yielded above by the correlation coefficient ["CC"] and mistakenly believe that the two assets move in opposite directions. Except for a very few cases, SGD:CA shares and Gold Futures (GCZ2023) have always progressed or retreated in lockstep, as shown by the higher presence of the red area in the upper part of the CC chart (i.e., above the zero line) than in the lower part of the CC chart.

The -0.59 reading just refers to the recent trend, where the stock had some exploration results that the market took very positively while gold had priced in more rate hikes the Fed announced at the June 14 meeting. This trend is better seen in the second CC chart, which depicts the correlation between SGD:CA shares and Gold Futures expiring July 2023 (GCN2023) by a light blue curved line.

This recent countertrend of the stock to gold's performance (gold is currently down ?7.5% from its 3-year high of $2,085.40 on May 4, 2023) has caused shares of SGD:CA to become overbought, is just a whisper away. The latter is indicated by an RSI (14-day Relative Strength Indicator) of 72.91 (see chart below), which carries the risk of a significant pullback from the current share price of CA$3.93.

Snowline Gold Corp. ((SGD:CA)) shares have been gaining momentum since late May after the company announced the start of its 2023 exploration and drilling program.

Roughly the same conclusion can be drawn for ((SNWGF)) stock with an RSI close to 70x.

About Snowline Gold Corp. in the Gold Mining & Exploration Industry

The company has mobilized drilling specialists and geologists to support a number of gold mineral projects spanning approximately 137,000 acres in Canada's Selwyn Basin, the most significant are Einarson and Rogue.

As for the Rogue project, the personnel responsible for it are engaged in exploration activities using diamond drilling technologies, particularly in an area called the Valley Zone, with the intention of arriving at an initial estimate of mineral resources.

With previous exploration results confirming the possibility of building a large-scale, high-grade gold-producing mine, Snowline Gold sees the greatest potential in this Valley Zone. Indeed, drilling will focus on more than 10,000 meters of the 18,000+ meters planned for all drilling and exploration activities in 2023.

The remaining drilling is targeting further mineral discoveries within Rogue, approximately 5,000 meters, while the remainder is specifically targeting an orogenic gold target called Jupiter on its Einarson project in Yukon. At Jupiter, regional stratigraphy would indicate inferred Carlin-style areas of mineralization that are deposits of microscopic gold particles.

According to the company's presentation released in June 2023, the potential of the Jupiter discovery is very similar to that of Agnico Eagle Mines Limited's (AEM)'s Fosterville gold mine , a high-grade and low-cost gold mine on track to produce 305,000 ounces this year.

All of these are very interesting mineral projects that lay the groundwork for future gold production, but it will take some time before these activities translate into anything concrete.

Snowline Gold Corp. had a total of $39.1 million in cash and short-term investments as of June 1, 2023, that the company can use to finance exploration activities. However, it cannot be ruled out that the company will have to raise additional capital through the issue of shares or capital loans.

So, with shares nearly overbought, there is not much room for further gains as the company releases more drilling results in the coming months. But there is a significant risk though that shares will fall in market value if the Fed hikes rates again.

Furthermore, shares of Snowline Gold Corp. ((SGD:CA)), whose market cap was CA$556.37 million as of this writing, were 46% above the middle point of CA$2.705 of the 52-week range of CA$1.31 to CA$4.10. Shares were also above the 50-day simple moving average value of CA$3.2754 and above the 200-simple moving average value of CA$2.8820.

Shares of Snowline Gold Corp. are also traded on the US Over-the-Counter market under the ((SNWGF)) symbol. As of this writing, shares traded at $2.99 apiece giving it a market cap of $417.64 million. They were 45% above the middle point of $2.06 of the 52-week range of $0.99 to $3.13. Shares were also above the 50-day simple moving average value of $2.4698 and above the 200-simple moving average value of $2.1423.

Therefore, these comparisons could further support this article's thesis that this might be the right time to sell some shares and lock in some of the gains. However, this would be part of a strategy to replenish the position once the stock has fallen significantly on lower gold prices due to additional rate hikes by the Fed and ahead of an expected gold bull market between late 2023 and 2024.

Conclusion

With the price of gold likely to trade lower due to the Fed's additional rate hike policy, this thesis proposes selling some Snowline Gold Corp. shares as these have reached overbought levels following the announcement of the commencement of the 2023 drilling and exploration program.

Snowline Gold Corp. is exploring approximately 137,000 acres of mineral properties in the Selwyn Basin, Canada, where the company plans to establish a major gold district. However, to date, we are still in the larval stage of these mineral projects.

This analysis suggests that shares could potentially decline significantly as the Fed hikes rates and creates more attractive entry points to replenish holdings in anticipation of an expected bull market in gold prices between late 2023 and 2024.

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