Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Background
The next ten days or so will present gold with two major events both of which could impact on gold in different ways depending on their particular outcome and they are as follows:
1. Possible interest rate hikes in the US as the FOMC meet
2. The US Presidential Election
FOMC
The long shadow of interest rate hikes in the US has haunted the precious metals sector for the last two years and is possibly the most important single threat to gold continuing its rally.
The Federal Reserve has pushed the mantra that they want to ‘normalize’ rates following a period of Quantitative Easing. In general the Fed has two objectives; firstly to ensure that unemployment falls and secondly that inflation heads north. These two requirements have largely been fulfilled so the expectation was to that the ‘normalization’ programme would be implemented with four or so rate hikes this year. The reality is that there haven’t been any rate hikes, but we have had a lot of talk suggesting that they are in the wings. The Fed speak is now falling on death ears as the Feds credibility has been severely dented. The next meeting of the FOMC will be held on the 1st and 2ndNovember 2016 and the market has more or less priced in that there will be no rate hike in November. However, as much as their previous guidance has been about as useful as a chocolate fireguard, this time it might be close to the mark. We expect the Fed to signal that a rate hike in December is almost certain and the markets will listen and position themselves accordingly. Personally I have my doubts that they will pull the trigger as they have shown little in the way of appetite to implement a rate hike regardless of the CPI and the monthly Jobs print.
If we assume that we do get the hike in December it will almost certainly give the US Dollar a boost which in turn will hamper gold’s progress. We also need to consider the demise of the other major currencies which have helped the dollar close-in on the 100 level on the US Dollar index. So the question we wrestle with is whether or not the dollars inverse relationship with gold will be maintained.
For what it’s worth we are of the opinion that we are entering a period whereby both the dollar and gold make good gains.
Taking a quick look at the chart of the US Dollar we can see it is a tad overbought at this stage and could take a breather in the near term, excluding any Black Swan event that may descend on the markets in the next week or so.
The US Presidential Election
This is probably one of the most interesting elections that we have had for some time; a classic case of the establishment versus the maverick. If we get a Clinton presidency then there will be more printing and more spending which will weigh heavily on the dollar and be supportive of gold prices.
In an update to our subscribers on 24th October 2016 we said “should Donald Trump pull it off we can expect at least a $100.00/oz jump in the price of gold.” This is based on the magnitude of the uncertainty that he would bring to the markets as he is unquantifiable as a political leader. There could also be a big move out the markets and into cash as traders reduce their exposure to any real or imaginary risk that such a dramatic change would bestow upon us.
Conclusion
The US Dollar is far from finished and talk of its imminent failure should be ignored.
The rally in precious metals has only just begun and this rally will be supported by those who distrust the establishment’s ability to maintain the purchasing power of their own currency on a nation by nation basis.
Most of our readers will be aware that we acquired both gold and silver some years ago and today our main focus is on the mining stocks. We currently have 40% of our funds in dollars, the rest having been placed in long positions in the precious metals sector.
The Gold Bugs Index, the HUI, is standing at 207 which is some 67.10% off its high (630-207) made in 2011. We see this as a buying opportunity that should be seized if you haven’t already commenced your own acquisition programme.
Finally, go gently and only deploy small amounts of capital into each stock as a week can also be a long time in the life of a mining company and we need to be able to take a knock and live to fight another day.
Got a comment, then please fire it in whether you agree with us or not, as the more diverse comments we get the more balance we will have in this debate and hopefully our trading decisions will be better informed and more profitable.
Go gently.
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