Friendly Trends For Gold And Gold Stocks
Lately, I have been doing a lot of homework on charts. It has been awhile since I’ve done an article on charts and thought now is a good time. In this report I want to describe the bearish trend in the US dollar (USD) and bullish trend in gold and for gold stocks.
I will start with the current charts for each, then include catalysts followed by prices I see as important milestones.
USD Under Pressure
The first thing I want to point out is the high it made in October of 2023. It then came under serious pressure until the end of 2023. Coming into 2024 it started a significant rally until it topped in April.
Since then it has been challenged with a lower high in late June, another in late July, and series of lower lows.
I pulled the one year futures chart of the USD index above from Finviz.com.
After that June lower high it has been under serious pressure, especially in the past couple of days. Of particular note during the past two days is the high volume on those down days. Including today with the highest volume during the past year by a significant margin.
In the past couple days, they were down days on heavy volume which is a very bearish trend. Not only are you seeing high volume on red days, it looks managed.
Today in particular it stopped right at 102 and then was propped up. That certainly doesn’t look like traders action, it looks like some folks don’t want it to crash.
One of the key support levels since the peak in October, 2023 has been around 104. It has easily dropped through that level in the past couple days.
Another key level is around 102 which is precisely where it traded down to today. Coincidence, I think not. Will it stay above that level, I highly doubt it.
When rates are going up and staying up it is supportive of the USD because when international investors want to buy US assets, they first have to buy USD. The opposite happens when rates are going down and it certainly looks like USD trading is suggesting rates are going down.
Which brings up the key catalyst that one needs to pay attention to when assessing which way the USD is going, interest rates.
The Fed is finished raising rates, the only question is when will they start a lowering cycle. Key factors of why they will have to lower include the economy, out of control government spending, government and consumer debt and the alarming rise in the cost of servicing the debt.
When it comes to the economy, the jobs market has serious problems and that certainly could drive the economy into a recession. I’ve written several times over the past months that full-time jobs are in decline while part-time jobs are rising.
Ask any worker how painful it is when they lose a high paying full-time job with benefits, then have to take on two part-time jobs with no benefits that combined pays them less than their former full-time job. The answer is clear, it hurts a lot, yet the government numbers suggest there has been one job created.
They can fool many people with their smoke and mirror numbers, but they never fool the worker that directly feels the pain.
Although the Fed talks about their mandate on employment and the politicians brag about creating jobs, the reality is much different for workers. I don’t believe that the Fed's highest priority is employment.
Another mandate the Fed talks about often is price stability concerning inflation. They talk about it in the context of stuff consumers have to pay for at the cash register when they buy things. If they truly cared about inflation, they wouldn’t have created it with the prolonged Free Money Era after the 2008 GFC.
The real price stability they truly care the most about is that prices of stocks on Wall Street keep going up. This helps their Wall Street banker friends which I and many others believe is who they are most beholden to.
They are also beholden to politicians even though they say they aren’t, the reality is that politicians have access to them and they appoint them. So a job market in trouble and a recession would not be helpful for the election, for either candidate.
Either Harris or Trump will not want to have to deal with a recession when they get into office, especially a severe one.
For all of these reasons the Fed has to lower rates. It is only a matter of when.
The day after the Fed meeting last Wednesday, when they stood pat on rates, the Wall Street stocks were under serious pressure. Likely due to the comments by Fed chairman Powell that indicated that they were still unsure about lowering rates and maybe that wouldn’t happen at the September meeting.
The selloff got worse on Friday after the unemployment numbers came out higher than expected. The Wall Street folks know that declining full-time jobs and increasing part-time jobs is not good. They realized that the September meeting is several weeks away and the Fed dropped the ball by not lowering in the July meeting.
Adding to the fear was that when stocks opened on Sunday night internationally, they got pummeled and this caused more pressure today on Wall Street stocks.
I like many thought it was a given that key Fed people would be out talking about their options. Such as a cut between meetings or at least signal a cut is coming in September that could be more than a quarter-point.
Instead, they sent out sacrificial lamb Austan Goolsbee to reiterate the party line that they are waiting on data and even if the market deteriorates they can fix it. This was rightfully ignored and stocks kept getting punished.
On the weekend, I was skeptical that the Fed would lower rates between meetings. Sending Goolsbee out did nothing to cool fears and now I think it is much more possible.
If they can dodge a cut between meetings, which would likely cause more fear as it would show everybody they made a mistake by not cutting on Wednesday of last week. A quarter-point cut in September is off the table and a half-point or even more is in the cards.
The bottomline for the USD is clear, interest rate cuts are coming. They are so far behind the curve that they will likely head back toward the Free Money Era. Plus, the Fed is likely to regain their position as the buyer of last resort for US debt.
They failed miserably at normalizing their balance sheet, which started at $9 trillion when they started fighting the inflation they caused with a big assist from the insane spending by politicians. They couldn’t even get it down to $7 trillion during a “strong economy with near full employment” creating a frightening base.
Key support that I am looking at is 102 on the USD index, which I think is going to be a thing of the past within days, then 100 and finally 90. If it drops below 90, then the 2008 low around 72 is in play.
How low it goes remains to be seen, but everything is lining up for it to go lower.
Gold Is Marching Toward The Gold Standard
Here we have a classic bullish trend from the lower left to the upper right. Gold really got going in early March and has since made a series of new all-time highs.
I pulled the one year chart of Gold futures above from Finviz.com.
From December, 2023 until late February, 2024 it created a very powerful base. Then it made an impressive breakout that took it up the two peaks above $2400 in April and again in May. It bounced around in another base with a top of a bit over $2400 and the bottom around $2300.
Since July rolled around, it has started another breakout with two higher highs and two higher lows.
The gold market since March has been gaining confidence that a rate cutting is getting closer and since July the confidence is getting palpable. I don’t need to reiterate here why the cuts are coming, those points were made in the part on the USD above.
Adding fuel to the fire of the powerful bull trend in gold is that the central bankers in the BRICS nations are buying gold in a big way. Eastern investors in India and China have been doing the same.
They see the writing on the wall that the Death Spiral of Debt is forcing a return to the Gold Standard. Their buying actually started after the Free Money Era post the 2008 GFC and then picked up dramatically since the war between Russia and Ukraine.
The BRICS nations got jittery when America sanctioned Russia and seized the foreign assets they could get their hands on. This didn’t sit well with many in the BRICS nations as they likely thought what happens if we run afoul of America.
The economic power of America hasn’t sat well with several countries for a long time. It is clear that the leaders of the BRICS nations don’t like the combination of the USD as the world’s reserve currency and its dominance in world trade.
I have written in several reports about the formula of why the world is heading to a modern Gold Standard. The basic math is the answer the Fed came up with after the 2008 GFC was the Free Money Era, which caused the Death Spiral of Debt that will result in a return to the Gold Standard.
With interest rate policy about to switch to a cutting cycle, gold is primed to go much higher.
The next breakout that I’m looking for is one that takes gold well over $2500 and I can see the possibility of $3000 before the end of 2024, if not then by the first quarter of 2025 at the latest. Everything is lining up for a series of new record highs on gold.
In Closing
The second quarter of 2024 was wonderful for several of the gold miners as it had the highest average price of gold for a quarter, ever. This was the second quarter in a row for new quarterly highs for the price of gold.
Not all gold miners are created equal, two standouts that are top picks in our reports Agnico Eagle and Alamos Gold have been firing on all cylinders.
Agnico Eagle just reported last week their third consecutive quarter of record all-time highs in free cash flow. Included in their quarterly report was that they generated half a billion dollars of free cash flow. Plus, they are increasing production and bringing down costs, none of the largest gold miners can say the same.
On the same day that Agnico Eagle reported their second quarter 2024 report, Alamos Gold did as well. They also reported record free cash flow and efforts to increase production and bring down costs.
The key things I look for in gold miners are free cash flow, and increasing production and low costs of production, if they can bring down costs even better.
Shareholders of both Agnico Eagle and Alamos Gold have been rewarded with their stocks trading at new record highs. Many gold miners are still below their record highs. All the key metrics are lining up for both companies to keep outperforming their peers.
Both Agnico Eagle and Alamos Gold are showing generalist investors that gold mining can be a terrific business when they operate mines with costs of production well below the industry average, plus have huge margins that look to expand as gold goes higher.
With gold in a powerful bull market, and free cash flow machines like Agnico Eagle and Alamos Gold, it is setting the stage for generalist investors to start paying attention to gold stocks.
Ultimately, this will help the gold stocks join the gold bull market. I’m really impressed that the market seems to be able to differentiate between the best in class and reward them as such.
When more investors find their way into gold stocks, I’m hopeful that the same will happen for small gold miners, gold mine developers and gold explorers.
All the best,
Allan Barry Laboucan
Disclosure
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