Fed Declares Victory Over Inflation While The USD Gets Pummeled And Gold Is In A Powerful Bullish Trend
Gold stocks have joined the gold bull market at the top end and are primed to move down the gold stock food chain. Generalist investors are starting to take a liking to gold and gold stocks.
Even though the employment numbers were significantly overstated, Chairman Powell still couldn’t admit that their internal models didn’t catch it. This reminds me of their transitory inflation call.
Their economic models are consistently terrible at predicting the future and also not very good at clearly seeing the past as well. It is pretty remarkable that they missed this when the jobs market is the most accurate indicator of where the economy is and where it is going. They dropped the ball on this one but didn’t even mention it in his address to his loyal economic subjects at the Jackson Hole, Wyoming conference.
It seems hard to believe that they didn’t see problems in the jobs market when the economy has been consistently shedding full-time jobs while increasing part time jobs. The problem with the higher paying full-time jobs is even worse as those were the highest revision to the jobs number with almost half the overstated numbers coming in this category.
It is without a doubt unfathomable that they couldn’t see the problem, they could have only not seen it because they didn’t want to. They had to be ignoring the trends in the jobs market because it didn’t fit into the narrative of their interest rate policy.
Although not acknowledging the revisions, he did declare victory against inflation and indicated that rate cuts are incoming. He said that based on the Fed’s favoured gauge of inflation, it is down to 2.5% and he is confident it is trending toward their goal of 2%.
In the past, he had stated that they are concerned about the risks of not keeping rates high for long enough or cutting rates too late. With the revisions to the unemployment data and the trend in losses to full-time jobs, it certainly looks like they are running the risk of being too slow to cut rates and risk a big drop in full-time jobs and pushing the economy into a steep recession.
Based on his comments, it sounds like the only question now is how much will they cut. Consensus is currently at a quarter-point cut, but a half-point cut can’t be off the table, especially if they see additional data that things are getting worse faster than they expect before the September meeting. The trends in full-time job losses certainly suggests that there could be some surprises that indicate the jobs market and the economy are softening more than they would like.
The way the USD index has been getting pummeled since the high in April, 2024, the USD traders are certainly bracing for several rate cuts. It is in a very bearish trend making a series of lower highs and lower lows. The pullbacks are very steep while the rallies are short lived.
The one year USD index futures chart is courtesy of Finviz.com
The price certainly looks like the lows in late December, 2023 and July, 2023 will be taken out very quickly.
Zooming out to look at the chart going back to 2018, it wouldn’t be shocking to see it trend to below 90. If they kept rates too high for too long and caused serious harm, there is a possibility that the lows around 75 after the 2008 GFC could be in play.
The longer term USD index futures chart is courtesy of Finviz.com
The least dirty shirt amongst the fiat currencies argument certainly is losing steam. Especially when gold is shining as the premier sound money as it is making new record highs against every currency.
The one year Gold futures chart is courtesy of Finviz.com
I contend that gold will regain its spot as the #1 world reserve currency. Recently, it passed the Euro to become the second largest currency held in reserves by the world’s central bankers.
If the USD goes into a steep correction because the Fed is heading back to the Free Money Era, it could rival the USD as the world reserve currency rapidly.
With the Death Spiral of Debt so bad, and little of the debt backed by gold, the other reason to be extremely bullish on gold is the world is well on its way, at least in the East, to return to the Gold Standard. It is becoming more of a question of when will the West be forced to return to the Gold Standard, not if.
Considering that the gold stocks were reluctant to join the gold bull market until the middle of February for the major gold miners. The gold developers and gold explorers have hardly come off the canvas of late. The gold stocks are looking very attractive as they have a lot of catching up to do.
My top picks for the large gold miners, Agnico Eagle and Alamos Gold have definitely joined the gold bull market. For very good reasons, they are making record quarters in free cash flow, plus moving ahead on increasing production and bringing down costs.
The second quarter was a blowout quarter for their free cash flow as it saw the highest average price of gold for a quarter, ever. The third quarter is on a path to be even better than the second quarter. Based on my speculation that we will see $3k gold before the end of 2024, the fourth quarter has the potential to exceed the second and third quarter for the average price of gold for a quarter.
Both Agnico Eagle and Alamos Gold, already produce gold for well under the average cost of production for the major gold miners which is somewhere around $1400 per ounce. So, at current prices they are making remarkable free cash flow that looks to get even better.
Making matters even better for both of them, they are moving ahead nicely on efforts to increase production and bring down costs. In the case of Alamos Gold, they are on a path to bringing their costs of production to below $1000 per ounce. This would make them one of the lowest cost gold miners on the planet.
If I was forced to pick one over the other, I would have to go with Alamos Gold due to their path to reduce costs. It wouldn’t be a no-brainer because Agnico Eagle produces much more gold and has much higher free cash flow and is in the top 3 of the largest gold miners in the gold mining business. When generalist investors get more active in the gold stocks they will find Agnico Eagle before Alamos Gold.
In the past, one of the most admired gold miners was Goldcorp, when they were in their heyday, they were one of the lowest cost producers and best performers amongst their peers. Plus, they also sat on some of their gold, which I think more gold miners should do. They did because they could, as they were a free cash flow machine. So, I have an affinity to low cost producers which is the key reason I would lean toward Alamos Gold over Agnico Eagle.
One of the things that could make me even more bullish on both of them is if they adopted a policy to start building a warchest of gold. They are both free cash flow machines, so they certainly can. It makes more sense for them to be in less of a hurry to sell all their gold and sit on fiat currencies instead of holding onto some gold.
With the strength in gold, it is reasonable to conclude that mergers and acquisition activity could pick up momentum. Recently, Gold Fields made a takeover offer for Osisko which could very well be the catalyst for more such moves in the gold mining sector.
Agnico Eagle has to be a very attractive target from the other two in the Big 3 of gold miners, Newmont and Barrick. Newmont is still digesting the acquisition of Newcrest so it would be a surprise if they made a run at Agnico Eagle. It certainly isn’t out of the question.
A more likely fit would be Agnico Eagle and Barrick to be a merger of equals. Together, they would be the largest gold miner by far. They would be large enough in size and in free cash flow that every generalist fund in the world that wants exposure to gold would buy with both hands.
Barrick’s CEO, Mark Bristow has stated on several occasions that they would get involved with M&A if they could find the right fit. He has emphasized that he doesn’t want to get bigger for the sake of being bigger, they want to get better. He has also mentioned that Canada is a key jurisdiction that they would like to increase production from, which is a key focus of Agnico Eagle. When he talks about what he wants, it sounds like Agnico Eagle fits his criteria to a tee.
It would probably take some convincing for Agnico Eagle to team up with Barrick as they are firing on all cylinders on their own. But, a no-brainer deal would be a combination of Agnico Eagle and Alamos Gold.
They are both remarkable operators with impressive free cash flow. They have the same business plan for growth. Especially when it comes to creating record free cash flow while working to increase production and bring down costs from their already costs below the average costs of production with the big gold miners.
Another exceptional takeover target is SilverCrest Metals. They are probably too small to move the needle for Agnico Eagle, but could make a positive addition for Alamos Gold.
SilverCrest is a low cost operator that has a free cash flow machine of a gold and silver mine. It is actually one of the best new mines to come into full commercial production over the past few years. I’ve been a big fan of Silvercrest for sometime in the reports from before they went into full commercial production until now.
They are a perfect example of looking for companies in the sweet spot of the Lassonde Curve when a company transitions from developer spending money to making money from mining. They have a low cost of production and high-grade with a high IRR that enabled them to quickly pay back the capital costs to build their mine.
You can see how great their mine is by how quickly they paid off their debt in a few quarters of full commercial development and built up a warchest of cash, plus gold and silver that exceeds the debt they had to build the mine.
I can see important developments for them that will likely happen in the near-term. They have to be a takeover target of several gold and silver miners. In addition, with their pristine balance sheet and growth in their warchest can definitely be a buyer.
There just aren’t a lot of great gold and silver development projects or smaller miners on the menu for takeover. A perfect fit for SilverCrest is Vizsla Silver that has a high-grade silver project in Mexico that has an incredible 85% IRR in their PEA. When I think of Vizsla Silver it reminds me a lot of SilverCrest prior to when they brought their Las Chispas mine into production.
They are both epithermal vein projects, so it is right up SilverCrest’s alley when it comes to building a mine at Vizsla Silver’s project. Vizsla Silver looks to be a natural fit for SilverCrest.
In Closing
The bullish arguments for gold are very powerful and it is primed to go much higher. The best in breed gold miners are absolute rock stars with their stock action. This is bringing generalist investors into gold stocks as the gold stocks are in the early months of joining the gold bull market.
The takeover offer by Gold Fields for Osisko is a likely catalyst to see more mergers and acquisitions. The larger companies buy others that are down the food chain of gold stocks which will send a bullish signal to the generalist investors to look down the gold stock food chain. A second bullish signal is that the mining companies are showing that the smaller gold companies are cheap and attractive which is why they are taking them over.
This summer has been one for the ages when it comes to gold. It has been on a tremendous run of making higher highs and higher lows with each new high being a record high. Gold stocks have entered into the gold bull market and now it looks like there could be more merger and acquisition activity.
This is happening before the Fed goes into a rate cutting cycle. The USD index is making a series of lower lows and lower highs in a very steep decline that suggests the Fed rate cutting cycle will lead them back to the Free Money Era.
These various events are definitely starting to catch the attention of generalist investors which is primed to increase dramatically. And start moving down the gold stock food chain, when that happens they will find a small menu of high-quality developers and explorers. I’m expecting the smaller gold stocks with impressive projects to see remarkably bullish share price performance.
All the best,
Allan Barry Laboucan
Disclosure
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