Inflation is rising and looks set to stay for several more months. With the Fed raising rates there is a chance the markets keep pushing them after so many years of low-interest rates. Plus adding 25bps each quarter will raise the cost of borrowing, prices of goods etc. for everyone, so inflation in that regard will increase. The miners are doing better as gold prices have stabilised above $1800 and look to travel higher.
Weekly Investment Idea – Gold Miners
In recent days we have seen equities selling off along with the likes of speculative trades within the crypto sphere. At this time, I have been expecting to see a big sell-off in the precious metals space too, as investors have over the past few years liquidated their gold and silver positions to service a margin-call.
Gold however is very stable and has now printed 2 bullish weekly closes above the $1800 level. If we get a third bullish weekly close above the $1800 that would be the first time since the run-up to $1900 back in 2021.
This week we receive word from the FOMC who will hopefully explain their thoughts and coming actions to tackle rising inflation. Gold has often been seen as an inflation hedge, but the reality is that it trades inverse to the real yield curve which is the inflation-adjusted yield curve. The market is expecting Fed Chair Powell to come out on Wednesday and say that lift off for raising rates in the March 2022 FOMC meeting. The market is also expecting at least 4 rate hikes of 25bps this year, so they will want to see the FOMC members placing their dots on the plot accordingly.
With rates very likely to go higher, the thoughts turn back to inflation, which is also projected on a higher course for the short to medium-term future. If rates do not rise faster than inflation the real yields will begin to fall again, and this is when the price of precious metals could be released from their current trend channels.
On the Commitment of Traders report from last week, the Commercials who are the Producers, Merchants, Processor and Users continued to lift their short position. This cohort is usually net short because they hold the physical, so if the price of gold were to travel lower, they are hedged by locking in a price. Currently $1800. However, if they are lifting their hedge, they, in my opinion, must be thinking there is a decent chance of locking in at a higher price further down the road.
For traders looking to get involved in the precious metals space, but without exposure to the manipulations often seen by the dealers, Bank of International Settlements and Prime Banks, there is always the possibility of investing in one of the precious metal miners/producers or an index of producers.
VanEck Vectors Gold Miners ETF
GDX aims to mirror the performance of the NYSE Arca Gold Miners Index before fees and expenses. Typically, 80% of the total assets of the non-diversified fund are invested in shares of gold mining companies and depositary receipts, providing an indirect exposure to gold prices.
At the end of 2021, the fund had a total net asset value of $13.10 billion and a 0.51% expense ratio compared to the category average of 0.46%. According to the November 30th 2021 fund portfolio, Newmont Corp. (NEM), Barrick Gold Corporation (GOLD), and Franco-Nevada Corporation (FNV) were the top holdings and at that time the fund was receiving $64.87 million monthly inflows.
In the current market, GDX pays a $0.19 annual dividend, yielding 0.55%. The fund has a Net Asset Value of $33.12 and a beta of 0.72.
The current weekly chart looks similar enough to the gold chart with prices stabilising above the $30.00 level which just so happens to be the weekly 200-period EMA and the 50% retracement from 2021 low to high. It won’t be until the GDX share price closes above $35.00 that the market structure will once again have turned bullish, so waiting for a breakout of the descending channel may be a more prudent investment strategy rather than buying the lows. Weekly momentum is weakening as the 20 & 50-period moving averages move lower.
Newmont Corp.
Newmont Corp. was founded by William Boyce Thompson on May 2, 1921 and is a gold producer. It operates through the following geographical jurisdictions: North America, South America, Nevada, Australia, and Africa. As the largest holding within the GDX, it has a significant sway along with Barrick Gold and Franco-Nevada on the direction of price action within the ETF.
As the largest weighting within the GDX, the price action of Newmont is signalling the GDX is in for some bullish momentum. The daily chart is stair-stepping higher and upside breakouts are backfilling to old resistance and finding support. This is a reversal of the price action seen last year and is a very easy way to get involved in a trend following strategy.
Barrick Gold
In a press release over the weekend, dated January 19th, 2022, Barrick Gold posted better-than-expected preliminary gold production for the full year of 4.437 million ounces which came within the 4.4-to-4.7-million-ounce guidance range. Preliminary copper production of 415 million pounds for 2021 was also within the guidance range of 410 to 460 million pounds.
The average market price for gold in Q4 was $1,795 per ounce, while the average market price for copper was $4.40 per pound.
As per the GDX and gold chart, the Barrick Gold price action is within a descending channel. I am of the belief that the breakouts of channels have a higher probability in the opposite direction to the direction of travel. With Barrick Gold coming up with better-than-expected results the next key indication that this share is a buy is if it breaks above the previous swing high of $21.20.
In Summary
As a trading idea, waiting until after the FOMC meeting, rate hike decision and press conference before jumping in on a trade would be advisable as there is likely to be a lot of noise this week.
Waiting for the market structure to show higher swing highs and higher swing lows would also be a good idea for those looking to follow a trend following strategy. Buying now would be a punt, but it would also potentially give you a good risk to reward ratio if you were willing to get stopped out at the nearest swing low as the trade would be asymmetrical with a lot of upside potential in whichever security you chose to trade in.
By trading the GDX you would be betting on the whole of the mining sector to do well, which is betting the precious metals do well too.