It’s time for a heart-to-heart about gold miners …
They aren’t doing well. In fact, they’re making me mad enough to eat iron and spit nails.
Today, I’m going to give you the short-term bad news … and the long-term good news.
Let’s acknowledge that the market is acting like it’s off its meds. Way up one day, way down the next. This is all related to investors reading the tea leaves on how much the Fed will hike rates.
And yes, this affects gold …
New Fed Chair Jerome Powell made his debut Tuesday. He told Congress that the economy is doing well. He also listed a few factors that might cause the Fed to move up the pace of three expected interest rate hikes.
Result: Fed Funds futures yanked the probability of four rate increases in 2018 to 32.1%. This is up from 24.4% a day earlier, and just 11% on Feb. 9. That’s according to CME Group data.
That triggered a stock market sell-off, because traders are addicted to the Fed’s previous prescription of endless easy money. It also caused interest rates to go higher. And that affects gold, because gold doesn’t pay interest.
It’s all a perception game. The fact is, metals can do quite well when interest rates go higher. For example, here’s a historical chart of the London Metals Exchange Index, a basket of metals (the blue line) tracked against Fed rate increases. You can see that metals, including gold, can go higher as rates go up.
So, history shows us that interest-rate hikes don’t have to hurt gold. What matters for gold is real interest rates. That’s the benchmark rate minus inflation. That is close to flat and could tip negative if inflation spikes.
And right on cue … inflation is heating up. The U.S. Consumer Price Index (CPI) rose 0.5% last month against projections of a 0.3% increase.
Again, rising inflation will chip away against real interest rates. And gold is traditionally seen as a hedge against inflation. That’s why metals performed so well in the chart above. But we can go broke waiting for the markets to wise up to history.
And I’m not making excuses for gold or miners. Miners are underperforming gold. And that’s vexing me.
Let me show you the action in gold and miners since the start of the year. I’ll also show you an investment that is hoovering up a lot of money that should be going into gold right now. (And it’s not Bitcoin.)
Since the start of the year, gold went sideways. Recently it was up a little over 1%. At the same time, gold miners kerplunked by 7.7%.
We expect gold miners to outperform the metal on the way up, and underperform it on the way down. Still, it’s hard to make excuses for miners when gold is going sideways and miners fall out of bed.
And what went up as gold went down? Tech. That’s right, money is looking for a hot place to invest, and tech is it.
Tech isn’t the only problem for gold miners. There are also energy metals, particularly lithium and cobalt. They excite investors, and gobble up investment dollars.
So what are gold miners doing wrong? Nothing! They’re becoming more efficient — squeezing profits out of mines, and avoiding the big deals that got them into trouble last time.
In other words, miners are becoming more of a bargain all the time.
What Will Break Miners’ Losing Streak?
The plain fact is that gold is drifting sideways. Investors got bored. They sold miners, and continue to sell. They chase after tech and industrial metals.
I think gold miners won’t go higher until gold goes higher.
The good news is that might not be far off.
What flattened gold — and crushed miners — recently is that China went on its New Year holiday. Happy Year of the Dog, amigos. But the Chinese are back now, and they’re the biggest gold buyers in the world. That could light a spark under markets.
Now let’s add in that inflation is heating up, as I said. And that many analysts think we’ve hit “peak gold”. In other words, production from the world’s gold mines will go down from here forward. We’ll only know when we see it in the rearview mirror. But generally when supply of something tightens, prices go higher.
For these and other reasons, I’m bullish on gold and miners. Just not yet. But I am making a shopping list for when gold turns higher.
Mind you, I’m not waiting on some individual opportunities. Ones that are too good to pass up. For example, earlier this month I visited a great little gold explorer, Northern Empire Resources Corp. (TSX-V: NM) (OTC Pink: PSPGF). Northern Empire is busy working in Nevada. What I saw there was so interesting I had to recommend it to subscribers. And this stock is up when many gold explorers are down.
You can see what I’m talking about in the video I shot on location:
Direct link: https://youtu.be/SGNrQu9BNic
Northern Empire has a past-producing, fully permitted mine that’s ready to go. And that’s not the exciting thing about this company. The exciting thing is all the “blue sky” potential on its nearby exploration properties, and its management team, which has sold projects for big bucks in the past.
Northern Empire has the kind of potential that the big miners will come running for when gold prices turn higher.
I don’t know when gold will turn higher. I do know that all the premium is being crushed out of gold miners, developers and explorers. The next move in that industry could be explosive. And that could catapult miners much higher.
All the best,
Sean Brodrick
