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Keep Calm and Stay Long: This Gold Price Correction Is Normal and Healthy

Summary:
In the nearly six years since Greg Abbott has been governor of Texas, the Lone Star State has been the number one destination for U.S. businesses looking to relocate. That includes California businesses. In 2018 and 2019, as many as 660 California-based companies pulled their stakes up and moved to greener pastures in Texas, where the cost of doing business is roughly 10 percent below the national average. Next up is Tesla. The electric vehicle (EV) company is currently in the process of building its fourth factory in the Texas capital of Austin, a growing tech hub with a young, highly educated population. A city in Texas may also be named headquarters to TikTok, the popular video-sharing app whose fate is still in limbo after Oracle and Walmart struck a deal to jointly buy the U.S.

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Keep Calm and Stay Long: This Gold Price Correction Is Normal and Healthy

In the nearly six years since Greg Abbott has been governor of Texas, the Lone Star State has been the number one destination for U.S. businesses looking to relocate.

That includes California businesses. In 2018 and 2019, as many as 660 California-based companies pulled their stakes up and moved to greener pastures in Texas, where the cost of doing business is roughly 10 percent below the national average.

Next up is Tesla. The electric vehicle (EV) company is currently in the process of building its fourth factory in the Texas capital of Austin, a growing tech hub with a young, highly educated population.

A city in Texas may also be named headquarters to TikTok, the popular video-sharing app whose fate is still in limbo after Oracle and Walmart struck a deal to jointly buy the U.S. service from TikTok’s Chinese parent company, ByteDance. This could bring as many as 25,000 high-paying jobs to the Lone Star State, according to President Donald Trump, who favors Texas as the app’s HQ.

Gov. Abbott touched on jobs, the economy and more during a Young Presidents’ Organization (YPO) event I had the pleasure of attending this week just outside San Antonio. He pointed out that the Texas GDP, at $1.9 trillion, is bigger than the economies of Canada, Brazil and Russia.

“We’re bigger than Putin,” the governor quipped, eliciting laughter.

Abbott also briefly addressed the recent protests across the nation, some of which have unfortunately turned violent. Texas would always support people’s First Amendment right to peacefully protest, he stressed, but once demonstrations resorted to rioting and looting, they were no longer protected by the Constitution.

Last week, I shared with you that the multi-city riots between May and June alone are now estimated to be the costliest civil disorders in U.S. history, costing the insurance industry between $1 billion and $2 billion in property damage.

This isn’t the first time I’ve praised our great home state, and it won’t be the last. An article I wrote four years ago on why everyone wants to move to Texas ended up being a huge viral hit on LinkedIn. Two years ago, Gov. Abbott tweeted another article I wrote, “6 Reason Why Texas Trumps All Other Economies.”

Gold Correction Is Normal and Healthy, Says the DNA of Volatility

Gold had its worst week since March, falling some 4.6 percent from last Friday, as the U.S. dollar staged a rally against the euro. The price of bullion closed below $1,900 an ounce on Wednesday for the first time since July 23 and is now down about 10 percent from its high of $2,075, putting it in correction territory.

I’ve already seen numerous headlines questioning whether this is the end of the gold rally. Hardly. As I’ve explained many times before, corrections such as this are normal and healthy. They’re a part of gold’s DNA of volatility. During the monster rally of the 2000s that culminated in gold hitting its previous record high of $1,900, there were several significant pullbacks, some of them exceeding 20 percent.

Take a look below. Gold is now more oversold on the short-term, 10-day relative strength index (RSI) than at any other time since the golden cross took place in January 2019. The last time the precious metal was this oversold, in mid-March, gold fell below not just its 50-day moving average but also its 200-day average. We’re not quite there yet—gold is trading below its 50-day but still well above the 200-day—but had you bought the March dip, you would have seen your position increase 40 percent over the next five months.

Keep Calm and Stay Long: This Gold Price Correction Is Normal and Healthy

Looking at a longer-term period, gold doesn’t yet appear to be oversold. The oscillator chart below is based on the daily gold price over a rolling 60-day period, which is equivalent to a three-month quarter. As you can see, gold has recently fallen out of overbought territory and is returning to its five-year mean, or average price. It’s important to remember that for the 60-day period, a move of one standard deviation is equivalent to 10 percent. In other words, the price of gold needs to changer by 10 percent to record a move of one standard deviation.

Keep Calm and Stay Long: This Gold Price Correction Is Normal and Healthy

Biggest One-Day Inflows into Gold-Backed ETFs

With real rates still negative (and likely to remain that way for some time longer), and unprecedented money-printing threatening to heat up inflation, I believe it only makes sense to buy the dips at this time.
That’s exactly what many investors did earlier this week. On Monday, when the yellow metal fell nearly 2 percent, investors added 1.2 million ounces to ETFs backed by physical gold. That was the most for a single day in 2020.

Keep Calm and Stay Long: This Gold Price Correction Is Normal and Healthy

Randy Smallwood: Precious Metals in “Golden Times”

Gold and silver are in “golden times” right now, according to Wheaton Precious Metals’ president and CEO Randy Smallwood during an online Denver Gold event earlier this week. The “helicopter money” from governments will continue to be highly supported of prices.

Randy is also optimistic of base metals, saying they were likely to be the bulk of streaming deal opportunities. “It’s good to see money going to the ground in the base-metals space,” he commented.

Wheaton Precious is planning to list on the London Stock Exchange, which will put the $23 billion streaming company on the radar of United Kingdom investors who are seeking to gain equity exposure to precious metals. Wheaton currently trades in Toronto and New York.

I believe this is a well-timed decision on the part of Randy, who was named the new chair of the World Gold Council (WGC) earlier this month. According to Edison Investment Research, precious metal companies listed in London “have tended to outperform their peers, with 52 percent of London-listed companies outperforming the gold price over the period of the worst depredations of the coronavirus so far this year, compared with 39 percent globally.”

Further, Wheaton Precious “will provide premium-quality, geared exposure to precious metals prices and fill a void for investors left by the departure of Randgold Resources in December 2018 after it was acquired by Barrick,” analyst Charles Gibson wrote in a note dated September 22.

As you know, Wheaton is one of our favorite mining stocks. At present it pays out 30 percent of its cash flow in dividends, but this could rise to between 40 percent and 50 percent with higher metal prices, Randy says.

Maverix Metals: A Rising Star in the Streaming Space

Another royalty and streaming company we have our eye on is Maverix Metals, formed in 2016 after the company acquired a package of assets from Pan American Silver. This week, Maverix entered into a binding purchase and sale agreement to buy a portfolio of 11 royalties from Newmont, including the Camino Rojo gold and silver project in Mexico.

The transaction, according to a note by Raymond James, “provides Maverix with potential near-term gold equivalent ounce (GEO) and cash flow growth from five development assets in the Americas, while adding longer-term optionality through the six exploration properties.”

Raymond James has given the stock an Outperform rating, with a price target of C$7.50.

We like the stock and, based on our quant stock-picking model, added it our portfolio. This replaced Australia-based producer OceanaGold. Maverix’ gross margin overtook OceanaGold’s in 2019 and has only continued to increase, which is why we made the rotation.

Keep Calm and Stay Long: This Gold Price Correction Is Normal and Healthy

Since it began trading in July 2016, Maverix has outperformed OceanaGold and other global gold stocks.

Keep Calm and Stay Long: This Gold Price Correction Is Normal and Healthy

JPMorgan to Pay Record $1 Billion Spoofing Penalty

On a final note, some of you may have heard that JPMorgan & Chase, one of the world’s largest gold and precious metal traders, is set to pay close to $1 billion to resolve market manipulation investigations by U.S. authorities that have been ongoing for months now. The settlement would allow JPMorgan to continue normal operations without being indicted.

Two former JPMorgan traders are being alleged of “spoofing,” or placing false orders with no intent to execute them to trick others into moving prices in a desired direction.

Unfortunately, market manipulation in the global gold market is real, but there are those who are fighting to expose it. If you recall from May of last year, I interviewed Chris Powell, secretary/treasurer at Gold Anti-Trust Action Committee (GATA).

We briefly discussed the JPMorgan spoofing scandal, during which Chris shared an interesting thought on John Edmonds, one of the traders: “He was allegedly doing it with the knowledge and counsel of his superiors, and if it were done on behalf of the government, presumably it’s legal under the Gold Reserve Act… [But] I can’t imagine the Justice Department would be prosecuting him if his trading was being conducted on behalf of the U.S. government.”

Gold Market

This week spot gold closed at $1,861.58, down $89.28 per ounce, or 4.58 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 7.51 percent. The S&P/TSX Venture Index came in off 6.72 percent. The U.S. Trade-Weighted Dollar rose 1.78 percent.

Date Event Survey Actual Prior
Sep-24 Hong Kong Exports YoY -3.0% -2.3% -3.0%
Sep-24 Initial Jobless Claims 840k 870k 866k
Sep-24 New Home Sales 890k 1011k 965k
Sep-25 Durable Goods Orders 1.5% 0.4% 11.7%
Sep-29 Germany CPI YoY 0.0% 0.0%
Sep-29 Conf. Board Consumer Confidence 90.0 84.8
Sep-29 Caixin China PMI Mfg 53.1 53.1
Sep-30 ADP Employment Change 650k 428k
Sep-30 GDP Annualized QoQ -31.7% -31.7
Oct-1 Initial Jobless Claims 850k 870k
Oct-1 ISM Manufacturing 56.0 56.0
Oct-2 Eurozone CPI Core YoY 0.5% 0.4%
Oct-2 Change in Nonfarm Payrolls 900k 1371k
Oct-2 Durable Goods Orders 0.4%

Strengths

  • The best performing precious metal for the week was gold, but still down 4.58 percent. Gold took a hit this week from a stronger dollar and investors bought the dip. The SPDR Gold Shares saw an inflow of more than 30 tons on Monday. Gold-backed ETFs had the biggest day of inflows in 2020 collectively on Monday of 1.2 million ounces. This shows confidence in the metal despite prices swings. With this past week also being one of the bigger gold mining industry investor conferences, the rush to flush the gold miner’s positive message of free cash flow and rising dividends by gold bears didn’t resonate for long.
  • Great Dyke Investments, owned by Russia’s Vi Holding and Zimbabwean investors, cleared a hurdle to develop Zimbabwe’s biggest platinum mine. The African Export-Import Bank completed a due diligence study allowing the company to proceed with a $500 million syndicated funding program. Once complete, the project is expected to produce 860,000 ounces of platinum group metals and gold a year and would significantly boost the country’s economy.
  • Maverix Metals is acquiring a portfolio of 11 gold royalties from Newmont for upfront consideration of $75 million and contingent payments of up to $15 million. Ghana plans to list its gold royalty fund Agyapa Royalties on the London Stock Exchange in October and plans to raise $400 to $500 million from the IPO, Reuters reports. The fund share will also be listed on the Ghanian Stock Exchange.

Weaknesses

  • The worst performing precious metal for the week was silver, down 14.55 percent as expected with the selloff in gold. Silver is back in a bear market. After approaching $30 an ounce in mid-March, silver suffered severe losses this week on a resurgent U.S. dollar and concerns about growth. The metal traded below its 50-day moving average for the first time since May.
  • The key driver of gold prices right now is the U.S. dollar – and it’s making a comeback. The two assets historically trade in the opposite direction. The dollar’s vigor is linked to fading hopes of another stimulus package from the U.S., but it shouldn’t last since Federal Reserve policy will remain expansionary for years.

Keep Calm and Stay Long: This Gold Price Correction Is Normal and Healthy

  • Fresnillo Plc, one of the world’s biggest silver producers, took the rare step of locking in gains from the silver’s almost 50 percent rally this year, reports Bloomberg. The Mexican-focused mine said it has hedged 7 percent of next year’s output with a floor of $20 an ounce and a ceiling of $50 an ounce. Hedging has been shunned by investors who in the past spent at least $10 billion unwinding unprofitable forward sales when prices surged.

Opportunities

  • According to Citigroup, gold could hit a new record before the year-end aided in part by the risks surrounding the U.S. presidential election. Analysts including Aakash Doshi said in a quarterly commodities outlook that uncertainty over election results could “be under-appreciated by precious metal markets.” Bloomberg notes the bank implies a surge of more than $200 for bullion futures from current levels.
  • Even though gold is trading lower, that doesn’t mean the rally is over, writes Bloomberg’s Eddie van der Walt. Gold’s move that started below $1,230 in 2018 has been filled with pauses. Gold is trading at the lower end of its pennant-range and the “path of least resistance is higher.” Bullion hit its new record high just last month above $2,075 due to global stimulus, negative real rates and a weaker dollar.

Keep Calm and Stay Long: This Gold Price Correction Is Normal and Healthy

  • After announcing a surprise 3.5-fold mining extraction tax increase in Russia last week, the government slightly reversed course. Silver mining will be excluded from the tax and new mining projects will also be shielded. Canada’s Wheaton Precious Metals is planning to list of the London Stock Exchange by the end of this year, said CEO Randy Smallwood. The royalty and streaming company hopes to tap into investor demand for streaming deals.

Threats

  • In an open letter to the mining industry, a coalition of prominent gold investors and money managers said performance of mining companies “continues to fall short.” The investors were targeting issues such as executive compensation and directors who own few shares of the companies they represent. “Though the performance of gold mining stocks has been noteworthy recently, we believe that performance continues to fall short in the areas of corporate governance, alignment of incentives and strategic vision & communication with investors,” the group said in the letter released Sunday, the first day of the annual Denver Gold Group Americas conference.
  • Two precious metals dealers and their firms are the target of a joint civil enforcement action filed in a Texas court by the Commodity Futures Trading Commission (CFTC) and 30 state regulators, reports Bloomberg. Metals.com, Barrick Capital and its principals have a complaint against them charging the defendants “with executing an ongoing nationwide fraud that solicited and received more than $185 million in investor funds to purchase fraudulently overpriced gold and silver bullion.”
  • Gold fell to a two-month low as the dollar extended gains and hopes for further U.S. fiscal stimulus faded, writes Bloomberg. “If global growth concerns continue to push up the U.S. dollar, like we have seen this week, we could see some near-term headwinds for the precious metal,” Vivek Dhar, commodities analyst with Commonwealth Bank of Australia said.

 

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average lost 2.61 percent. The S&P 500 Stock Index fell 1.74 percent, while the Nasdaq Composite rose 0.03 percent. The Russell 2000 small capitalization index lost 4.39 percent this week.
  • The Hang Seng Composite lost 4.64 percent this week; while Taiwan was down 4.97 percent and the KOSPI fell 5.29 percent.
  • The 10-year Treasury bond yield fell 3 basis points to 0.656 percent.

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

You can read the full article at http://www.usfunds.com/investor-library/investor-alert/keep-calm-and-stay-long-this-gold-price-correction-is-normal-and-healthy/

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