WHAT IS GOING ON WITH GOLD?

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Edgar Harrell
5 years ago
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1 WHAT NOW??

2 WHAT IS GOING ON WITH GOLD? Volatile few days! Everyone expected a Trump win would boost gold instead gold futures fell 6.1% this week, biggest weekly drop in 3+ years Miners took the brunt Agnico Eagle down 15% Silver Wheaton down 16% Barrick down 13% What the what???

3 THE TRUMP EFFECT TODAY US markets gained significantly because Trump plans to: Cut marginal income tax rates Cut corporate tax rates (from 35% to 15%) Roll back regulations (Obamacare, Dodd-Frank) Support domestic energy with much less enviro restraint One Million Other Things Real question: What will he actually do? Far more ideas than possible to accomplish.

4 BONDS & RATES Equities reaction is interesting, but bond reaction is more important. Yields spiked 10-year US Treasury Yields This is NOT a reaction to higher growth it is a reaction to MORE DEBT (trillions of dollars during Trump presidency)

TRUMP, BONDS & INFLATION Infrastructure spending, defense spending, tax cuts, protectionism through tariffs à US spending is going up and income is

5 TRUMP, BONDS & INFLATION Infrastructure spending, defense spending, tax cuts, protectionism through tariffs à US spending is going up and income is going down As this ratio rises: (spending-income) *100 spending so does inflation The other impact: fewer buyers for bonds (lower prices, higher yields)

6 BOND + RATES = GOLDEN SETUP Bond investors have already seen $1 trillion in losses since election. Will investors want to keep buying treasuries in a rising yield, inflationary environment? Not likely. So where will Trump find money? Rising ratio means US debt is riskier. Inflation erodes value and weakens USD. Rising yields should mean higher rates but US can t afford higher rates. Two results: Real yields fall (inflation outpaces nominal rates) Governments follow Japan s example and cap yields?? Lower real rates, weaker USD, higher volatility, no safety in bonds or cash à Very bullish for gold

US MARKETS S&P 500 Stocks appear overvalued Bull run has been long Change of guard in Washington Fundamentals not strong (ex: declining earnings for 5 quarters) Rising bond yields attracts spec

7 US MARKETS S&P 500 Stocks appear overvalued Bull run has been long Change of guard in Washington Fundamentals not strong (ex: declining earnings for 5 quarters) Rising bond yields attracts spec interest from stocks, where average dividend yield is only 2%. Higher rates means individuals & companies will have harder time raising money, reducing investment All suggestive of a US market downturn. Generalist rotation from US stocks into gold pours fuel on fire Not immediate timing depends on Trump?

8 GOLD TIMING & TRUMP Markets erring on side of optimism in terms of Trump Reaction will come as his actual goals & team become apparent He knows a market surge only helps, so expect focus on infrastructure & military spending, tax cuts and Obamacare Rising US markets will hurt gold but volatility will increase as Jan 20 approaches. Volatility is gold s friend. Trump could say or do something before then??? Gold corrections following a sharp gain generally Last 5 months Have W shape October low was first bottom second bottom developing now, as December Fed meeting approaches?

9 RATE HIKE COMING Fed Vice Chair Stanley Fischer on Friday: Economic growth prospects appear strong enough for a gradual hike in interest rates Yellen will raise rates if it s the last thing she does (and it might well be because Trump is no fan). Entire tenure was a giant easing experiment and tightening would suggest the experiment worked. Yellen also desperate to create room to cut rates in case of recession. Trump s victory pushed odds of a December rate hike up.

10 THE BULL: CATCHING ITS BREATH Gold-fueled mining rally still has legs. Low or negative real rates globally Massive corporate and government debt loads Bond bubble bursting Equity overvaluation USD challenged under Trump Cyclicality of gold Rare offer of security and value Yes, gold price has corrected. But corrections are part of a bull market. Defining characteristic is still: higher highs and higher lows.

11 GDXJ

12 Gold Standard B2Gold

13 GOLD ETFS STAY STRONG Through gold s correction, ETF holdings have stayed strong

14 CORRECTION = OPPORTUNITY Unless Trump does something scary, gold will stay weak at least until Dec 14 (Fed meeting). After that Trump uncertainty + rising bond yields + rising inflation + rate hike done = good setup for gold (Market run, if it continues, could impede ) Means the next month is very good buying opportunity!

MAJOR PRODUCERS Majors are the first to rise when bear turns bull à Spent bad years cutting costs & focusing on profit, not production à Straightforward way to

15 MAJOR PRODUCERS Majors are the first to rise when bear turns bull à Spent bad years cutting costs & focusing on profit, not production à Straightforward way to gain leveraged exposure to rising gold à Benefit from big buying: ETFs, indexes, funds Kinross: up 230% Jan Aug. Off 41% Aug today. 350% gain to reach 2009 peak!

MID-TIER PRODUCERS The bear was marked by massive writedowns &

high and are now managed Like majors, cut production costs in

16 MID-TIER PRODUCERS The bear was marked by massive writedowns & debts among majors. Against that: investors are loving mid-tier producers Fewer operations means lower overhead costs Debts never climbed so high and are now managed Like majors, cut production costs in bear so primed to profit Lack of debt + cash flow = able to act on M&A opportunities B2Gold Richmont Endeavour

entering production at start of bull run, not end Set up to expand mill at minimal cost If not acquired, offer leverage to gold, production

17 SMALL & NEW PRODUCERS Few small or new producers these days (bear was vicious) The small producers that survived now doing very well New producers only the best got built Both offer two good endgames: profitable production or takeout Roxgold (ROG): Building in bear means entering production at start of bull run, not end Set up to expand mill at minimal cost If not acquired, offer leverage to gold, production success re-rating, expansion upside Caledonia Mining (CAL): Reinvested in mine during bear now production set to rise through bull market Pays dividend

permitable jurisdictions will get built or bought Share price

18 DEVELOPERS Only very good projects kept momentum through bear Straightforward projects with good economics in supportive, permitable jurisdictions will get built or bought Share price moves show investors are betting on this group Integra Gold Atlantic Gold

EXPLORERS Exploration plays are the highest risk option

Determine your necessary level of confidence: Do you buy

19 EXPLORERS Exploration plays are the highest risk option in our sector but can offer the highest rewards. Determine your necessary level of confidence: Do you buy before drilling based on targets? When the first drill hits? Once there is follow up success? Investors are moving on all stages today. Northern Shield Auryn Resources Nighthawk Gold

20 RISK & OPPORTUNITIES: NEW DEBUTS Mining s movers and shakers spent the last 5 years planning how to ride the bull when it arrived. Some plans got underway during the bear: Newmarket Gold Other plans are being unveiled now: Ashanti Gold, Black Sea Copper&Gold It pays to follow proven people/teams! Newmarket: proven team put new life into operating Aussie gold mines. Gained 260% in a year before getting taken out Ashanti Gold: experienced and wellconnected geo team acquiring and advancing assets in West Africa, in a company with a tight structure

21 MANAGEMENT Know WHO manages your money Track record Vision Capital access Execution Responsiveness Your gut!

22 ENTRY POINTS If buying in market: Is a raise coming free trading? Is there corporate news pending? What is the near term for the commodity in question? If a financing is pending can you get in?? (Maven Premium Service pending, focused on precisely this. Ask if interested)

23 PORTFOLIO SIZE Keep your mining portfolio manageable I talk about spreading across all these kinds of opportunities (and around different commodities: zinc, silver, copper, uranium) but you don t need exposure to everything!!! Too many stocks and you lose track

STRONG WEEK AHEAD OF BIG WEEKEND

LPL RESEARCH WEEKLY MARKET COMMENTARY December 3 2018 STRONG WEEK AHEAD OF BIG WEEKEND John Lynch Chief Investment Strategist, LPL Financial Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial KEY