ABX:CC - Why Gold Is Probably Going To $5000 Soon

2023-10-11 10:19:27 ET

Summary

• Gold has been trading sideways for the past three years, testing the all-time high, correcting toward support levels, and looking for an opportunity to break out to much higher levels.
• Gold's technical indicators suggest it is oversold and entering a positive momentum phase.
• The Fed's monetary tightening cycle is nearing its end, which could lead to a surge in gold prices and a bull market stampede.
• I expect Gold to reach $5,000 in the next 2-3 years, and top gold mining companies could appreciate by severalfold.

After a substantial run-up in 2019 and 2020, gold has moved sideways for around three years. Gold has traded in a tight range, testing the all-time high ("ATH") around $2,100 and correcting by approximately 20% toward the crucial $1,600-$1,650 support level. Also, we must consider that gold has continued to trade sideways despite the tightening monetary environment, an atmosphere that would typically be bearish for the yellow metal.

Gold 5-Year Chart

Gold has made several attempts to make a decisive break out to new ATHs. The first attempt was in 2020, but the gold market was massively overbought. The second attempt was in 2022, but the market was overbought again, and the Fed was in the early stages of its monetary tightening process. More recently, gold made another attempt in early May but was rejected due to fears of more rate increases in 2023.

However, we've now seen a healthy long-term consolidation process for gold. Moreover, gold's RSI recently dropped to around 20, illustrating one of the most oversold technical conditions over the last five years. We now have the full stochastic turning upward, suggesting gold is entering a more positive technical momentum phase.

Moreover, gold's fundamental backdrop looks increasingly favorable. Most importantly, the Fed is approaching the end of the monetary tightening cycle, and we are likely around a top in rates. Gold could do exceptionally well as the Fed pivots toward a more accessible monetary stance. We've seen the outperformance in gold in other easy monetary cycles, most notably the post-financial crisis rally and the surge from the lows in 2015.

Gold Likely To Surge Much Higher Soon

We see gold trading around its prior ATH peak in 2011. Once gold makes a clean break out above $2,100, there are no resistance levels, and gold could surge substantially higher quickly. In addition to the constructive fundamental factors associated with the Fed and interest rates, gold should benefit from its safe-haven status as conflicts in Ukraine, the Middle East, and other hotspots continue festering.

Global monetary supply and debt loads in the U.S. and worldwide continue surging. Also, while inflation has moderated recently, it will likely persist, and we may see higher inflation levels become normalized in future years. Therefore, there is a high probability that gold will break out to new ATHs soon, and we could see a considerable bull market stampede that may elevate the yellow metal to $5,000 or higher in the next 2-3 years.

Why $5,000 Or Higher?

The best time for gold prices is during an easing cycle. Since we are around the top in the current tightening phase, the Fed could begin lowering interest rates in H1 2024, roughly 6-9 months from now. Previous bull market stampedes have taken gold higher by approximately 100-300%. For instance, in the early 2000s, gold rose from about $300 to around $900 under the low-rate monetary regime. Then, we had a significant rally from approximately $800 to roughly $2,000 in the initial post-financial crisis QE era.

More recently, we saw a rise from around $1,050 to over $2,000 as it became evident that the Fed's balance sheet is not getting wound down as previously expected. If history repeats itself, and as it becomes apparent that the Fed's balance sheet is never going to be wound down, and that the Fed will likely return to easing and possible QE to stimulate the economy in 2024, gold should experience another significant rally of 100% or greater in the coming years.

The Fed's Balance Sheet - We've Seen This Before

The Fed has reduced its balance sheet by around $1T since QT began. We saw a similar dynamic when the Fed briefly introduced tightening and QT in 2017/2018. However, that attempt ended poorly as the economy nearly dipped into a recession by late 2018, and the Fed reversed policy, leading to monetary easing and eventual QE in 2019-2021. We're at another inflection point as the interest rate cycle is peaking. The Fed should pivot to a more accessible monetary environment to boost economic growth in early-mid 2024.

Therefore, while QT may continue in the near term, reducing the Fed's balance sheet by another $500 billion (roughly), we will likely see another reversal in balance sheet reduction as the Fed transitions to an easier monetary stance. Furthermore, we must consider that the Fed is in the business of backstopping everything. If there are "bad mortgages" on bank books, the Fed can buy MBSs to avoid a crisis.

The Fed can penetrate almost any pocket of the banking system, municipality, and Federal Government to infuse capital, transferring the "bad assets" onto its balance sheet. Thus, we should see further balance sheet increases due to the potential for future QE and crisis management, leading to increased demand for gold.

The Fed Is Close to Pivoting

Whether the Fed admits it or not, it's likely close to pivoting to a more accessible monetary stance. We're seeing incredibly high interest rates around the board, and many rates are around multi-decade highs.

10-Year Treasury

Aside from a brief jump in 2006/2007, the U.S. 10-year treasury is around its highest level in over 20 years. High yields cool the economy by increasing the cost of borrowing. Moreover, high bond rates offer an alternative investment class to safe-haven assets like gold and silver. Investors can have a "safe" yield of around 5%, decreasing demand for gold.

However, we may have seen a blowoff top in yields, as the 10-year nearly hit 5% recently. Also, mortgage rates, credit card plans, and other significant rates are at multidecade highs here and must move lower to avoid a hard landing for the economy. This high rate dynamic is detrimental to the economy and is unsustainable in the intermediate and long term. Therefore, the Fed must act to reduce rates soon.

The FOMC - No More Rate Hikes

There is a 74% probability that the Fed will not raise rates again in 2023. This dynamic is a significant improvement from the 54% chance one month ago, and the trend toward a more dovish monetary stance is highly instructive here. Moreover, there is an increasing probability that the Fed will likely begin lowering rates in early-mid 2024. We have about a 70% probability that the benchmark will be at least 25 Bps lower by mid-2024. This dynamic signals that the Fed is around the top of the interest rate cycle, and rates should start moderating soon.

As Gold Moves Higher, Gold Miners Should Benefit

- The Gold Mining Segment

Gold and gold miners should get a solid bid as the safe-haven trade continues benefiting. Investors turn to gold during times of conflict and uncertainty, and the top companies in the gold mining space could do exceptionally well. Additionally, gold went through a constructive correction recently, and numerous favorable fundamental factors should push prices higher in the intermediate and long term.

SPDR Gold Shares ETF ( GLD )

GLD is the most significant gold ETF globally, tracking the price of gold seamlessly. Gold went through a substantial 13% correction after topping out in early March. High rates and a strong dollar contributed to the decline, but these transitory factors should ease, allowing gold to go significantly higher.

GLD got exceptionally oversold, as its RSI crashed to around 20 recently. We also see the CCI well below -200, illustrating the most oversold technical conditions in over a year for GLD. The full stochastic is turning higher, suggesting a shift to a more favorable moment.

Top gold mining stocks have also become deeply oversold recently. Agnico Eagle Mines ( AEM ), one of my favorite names, dropped from a high of around $60 in March to just $43, a 28% decline. AEM should report revenue growth of about 15% this year . It trades at a forward (2024) P/E ratio of below 20 and provides a dividend of around 3.6%.

AEM and other high-quality gold mining stocks should experience better than anticipated revenue growth and earn substantially more income as the price of gold increases in the coming years.

Barrick Gold ( GOLD ) is my second favorite gold mining company, and the stock recently went through a similar but slightly more significant 32% decline.

Barrick - EPS Likely To Be Much Higher

Barrick's revenues should grow by about 9% this year, with EPS growth around 18%. Moreover, Barrick is cheap now, trading around 12-13 times next year's consensus EPS estimates. Barrick also pays a 2.8% dividend. One factor I must point out is the flatlining consensus EPS estimates.

This phenomenon suggests that forward EPS estimates are predicated on a stagnant gold price. However, if the price of gold moves above $2K and proceeds higher to $5,000 or higher, Barrick and other high-quality miners should see their EPSs increase considerably in the coming years. Despite current EPS estimates, gold should break out above $2,000 and may move substantially higher as the Fed pivots to a more accessible monetary stance in 2024.

We are likely around the peak of the interest rate cycle, and once rates start falling, gold should rise, leading to upward revenue and earnings revisions for Barrick and other gold miners. This dynamic should lead to higher-than-expected EPS, multiple expansions, and considerably higher stock prices for high-quality gold mining stocks.

Other top-quality gold miners in my portfolio and on my buy list include Kinross Gold ( KGC ), Alamos Gold ( AGI ), Gold Fileds Ltd. ( GFI ), and others.

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