Gold Miners: The Lull Before The Calm Before The Storm

Politics

As the final presidential debate is over, one wonders if we will hear anything of substance or be subjected to a continuous barrage of ‘soap opera’ style chit chat. Hilary Clinton’s lead is increasing according to the bookies with the latest odds at 1/5 and Donald Trump at 9/2. The sooner this is over the better for all of us as the uncertainty will have been removed…and we can get back to business as usual. Whatever the result, both candidates are big spenders. Consequently, we can expect many more dollars to be printed which will help support the gold price in dollar terms. However, we should also be cognizant of the fact that the other major currencies are all in dire straits, the Yen, Euro and British pound are all looking weak, which in turn is supportive of the dollar, rendering the dollar as the best looking horse in the glue factory, as they say.

Britain's exit from the European Union continues to cast a shadow over the Euro and the Pound which has plunged 18% against the dollar to its lowest level in 30 years. The Euro is also tanking which is bad news for those who live there…and if they don’t own any gold.

The next French presidential election is scheduled to be held in April and May 2017. The incumbent president, François Hollande is eligible to run for a second term and the bookies have him at 12/1 chance. The favorite is Alain Juppe at 5/6, followed by both Marine Le Pen and Nicolas Sarkozy at 6/1. Should Marine Le Pen, the leader of the French right-wing political party National Front (FN) be victorious then France will undergo major changes regarding religion, immigration and the economy. As with the Brexit this will bring more uncertainty to the European Union as its very survival will be called into question.

In our opinion these political uncertainties bring with them fear - and fear tends to drive the precious metals sector. But don’t get over confident with it as fear also drives the dollar. Moreover, the dollar is easier to move across borders as it can done on the tap of a key board, at least until capital controls and imposed upon us.

Background

The USD is up 5% in the last three months, while gold is holding just above $1266/oz, as of today October 20. The presidential election might be center stage, but the possibility of a rate hike before the year end is being eagerly observed. We doubt that there will be a rate hike in November as it would come just prior to the election. Nonetheless, there is the possibility of one in December, after the election. This we would see as a token jester as we don’t believe that the Fed has the backbone to implement 4-5 straight hikes as it has warned of in the past.  The Fed’s credibility is truly shot. Anyway, the main driver for the dollar is the demise of the other currencies…regardless of the Fed’s inactivity. It would also appear that the stock markets are topping out at the moment. Therefore, the alternative may be a move to cash. Consequently, we could be in a situation where gold and dollar go up in unison.

Gold has taken the hit, forging my opinion that this current level of around $1250/oz plus is near enough to a bottom to render the downside risk limited. The same goes for the gold and silver miners as the chart below shows the Gold Bugs Index (HUI) has retraced some of its steps from the 285 level back to the 198 level - and is currently standing at 217. It should be noted that the HUI is still some 66.5% off its high (630-217) made in 2011. Consequently, there is a lot of ground to made up.

Prediction

Here is a gentle reminder of a prediction we included in an update to our subscribers recently - and one we are sticking by:

“Some of the precious metals mining companies that are available today and can be purchased for $2, $3, $4 – they will go up by the same amount in one trading session when this bull market starts to really spark. That’s right a $3.00 stock will increase by multiples of its current price, a 7 fold move would see this stock trading at $21.00, then we get a spike of say 15% in one day for an increase of $3.15. We will re-visit this prediction in a few years from now and see if we were close or not.”

Our target price of $10,000/oz hasn’t changed since day one, which was Monday, 6th June 2006.  We still stand by it.  Moreover, we anticipate this will take around four or five years or so to achieve. Rest assured it will be a white knuckle ride all the way.

Conclusion

This is a dip…so buy it…do not sit on the fence.

We are continuing with our strategy of layering into both gold and silver mining companies.

The fundamental factors haven’t really changed very much; money printing will accelerate as this is the only tool that the central bankers have at the moment. Individual national economies are staggering from pillar to post, reminiscent of a drunken man trying to find another bar late at night.

China, India and the Arab world will continue to consume the annual production of the physical metal, which BTW is dwindling. To be sure the low hanging fruit has all been picked.

Also watch the UK and European banks as they are having a difficult time at the moment. Deutsche Bank AG (USA) (NYSE:DB) is down around 45% YTD along with RBS down 52% YTD, having lost 6.5% in one week, along with the Italian banking sector which is looking ever more fragile.

The fragility of the banking system is another good reason for us not to keep our gold holdings with them.

Finally, do some work, buying into a fund will give you an average return. They are vehicles for idle investors; good quality stocks will outperform and generate much better returns.

Hopefully you have used the last few years of this bear market to prepare your acquisition programme for when the bear phase ends and bull phase resumes. This next bull phase is leaving the station right now – are you on this train or not?

Finally, go gently and don’t fall in love with just one particular stock, this is not a game about love; it is a game about logic, discipline, hard work and courage.

Got a comment, then please fire it in whether you agree with us or not, as the more diverse commentary 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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