Gold Stocks Are Primed To Go Much Higher
For months the weakness in the jobs market has been on a troublesome path for anybody paying attention to see. The BLS has done what they can to manipulate the numbers, but seeing the economy shedding full-time jobs and growing part-time jobs should have given every economist cause for concern.
It was surprising when the BLS came out with a massive revision just before the Fed’s conference in Jackson Hole. Which caused the Fed enough concern that they immediately declared victory over inflation and set the stage for rate cuts.
On the heels of that revision, they were at it again yesterday. In addition to reporting an alarming report on jobs well below estimates, they added insult to injury by coming clean on more overstating of jobs in June and July.
Yet, not a sole has mentioned that the BLS is doing a terrible job at a pivotal time for the economy. If any regular person or group of people screwed up their job as badly they would be instantly shown the door.
The talking heads in what passes for mainstream financial media stepped in to do their thing by trying to switch the narrative and say, oh it ain’t that bad. First they ignored the trend in full-time and part-time jobs, then the revisions prior to Jackson Hole, now they are trying to spin the revisions to June and July, as well the August number that came in much below the estimates as not bad. They are.
In an unexpected turn of events, Austan Goolsbee, who is usually sent out by the Fed to talk up the party line, actually looked at the numbers realistically. He mentioned that inflation and the jobs market are slowing faster than expected. He wouldn’t commit to leaning toward a half-point cut at the September meeting but he certainly was making the case.
In Fedspeak, he was putting out the trial balloon to gauge the reaction if the Fed does decide to cut by a half-point instead of the current consensus on Wall Street of a quarter-point cut. Next week, the CPI comes out. It is the last big economic report before the September Fed meeting. If that comes in below estimates, the Fed could very well start their rating cutting cycle with a half-point.
They may have to risk causing panic by admitting they are behind the curve as they have a dilemma with the next meeting not until November. Due to the timing of their meetings and the trends in statistics, they may have no choice.
Instead, they may try the quarter-point cut and talk about how they are closely following the numbers and have the tools to act accordingly. It might work, but they run the risk of needing to do something before the November meeting which will cause just as much panic as if they go with a half-point at the September meeting.
Regardless of which way they go, the numbers are lining up to a precarious position for jobs and the economy. They pushed the higher for longer narrative as far as they could and now they could have a mess on their hands. Powell wanted to be thought of as the second coming of Paul Volcker, but forgot the part about the Death Spiral of Debt that Volcker didn’t have to deal with.
This is all causing serious weakness in the US dollar (USD) which is in the early days of a bear market. It is making lower highs and lower lows in a steep decline. Considering the debt crisis, interest on the debt, and upcoming start to a rate cutting cycle, the USD has a lot lower to go.
The USD is trading like the rate cutting cycle is going back to the Free Money Era. I also contend that the Fed will have to dramatically increase their balance sheet. Plenty of former big buyers of US debt are selling and on a buyer’s strike.
Another issue is debt buyers have to start thinking about all the supply, and that they are paid yields in the declining USD. That combination with the added concern about the Fed being the buyer of last resort and primary buyer is not good for US debt.
While all of these factors are coming together, gold is in a powerful bull market that is in a trend of higher highs and higher lows with each new high a record for the price of gold. Investors in the East are well aware that gold is the soundest money. Western investors have been reluctant to join the gold bull market, but in the past few months inflows into gold ETFs is increasing.
We have the central bankers in BRICS nations putting themselves on the Gold Standard. Eastern investors own a lot of gold and they keep it for long periods of time, which has taken a lot of physical gold off the market. Now, Western investors are taking more physical gold off the market. Collectively, they are tightening the physical gold supply which is very bullish for gold.
Even the paper market gold traders are bullish, as the futures price is on average around $30 more per ounce than the spot price.
The bullish price for gold is extremely bullish for high-quality miners that are producing gold for around $1000 or more per ounce less than the price of gold. This is making for record free cash flow for some of them. The generalist investors are putting their toe in the gold stocks and could jump in the pool in a big way.
This is lining things up for gold stocks to go into an extraordinary bull market. Until February they were in a long-term bear market and reluctant to join the gold bull market. The bear market had shook out the sellers. The gold stocks were a coiled spring that had started to be released.
The base was so low that the valuations for gold stocks were beaten down and trading at historically low valuations on all the key metrics. With the reluctance of the gold stocks to join the powerful gold bull market, it has created a perfect storm for gold stocks to go much higher.
One of the key reasons that I am extremely bullish on high-quality gold stocks is that while demand for physical gold is strong, the supply chain of physical gold is weak.
The supply chain of physical gold is broken from top to bottom. Most gold miners are struggling to increase production while gold is at record highs. If they could increase production, they would, but they can’t.
Another big issue for the major gold miners is where are they going to get the projects to replace their old mines with new mines. The cupboard is bare when it comes to smaller miners and gold mine developers.
We are seeing signs that M&A activity is just starting, but there is only a small menu of projects that are prime candidates.
When it comes to the explorers, there are very few with impressive discoveries. This is due to long-term under investment in exploration that has led to success in finding great discoveries. The larger players are going to need to reach down and make strategic investments to become the partner of choice for the gold explorers and gold mine developers.
Another furious debate is between gold and gold stock bulls against the Bitcoin bulls on the other side pitching it as digital gold. Bitcoin has had its benefit from the ETFs coming on stream and brought in a lot of buyers at much higher average prices than the current price.
Bitcoin looks to have topped and in a bear market making lower highs and lower lows. The correction could gain a lot of momentum because it has to become worrisome for the recent entrants into it at higher prices and they are underwater. The valuation is much like the Dot-com stocks before the Dot-bomb happened.
With Bitcoin in correction and having been promoted as digital gold with promoters scoffing at the gold bulls as old timers. They are probably starting to think they should have gone with real gold instead of the Ponzi scheme of digital gold.
If gold and gold stocks start seeing some flows out of Bitcoin into them, it will create a lot of added momentum.
In Closing
The Fed is behind the curve and about to start a rate cutting cycle. Bitcoin and the USD are in trends that are seeing lower lows and lower highs. While gold is doing the opposite, making higher highs and higher lows.
The gold stocks are just starting to join the gold bull market and are coiled springs. Generalist investors have entered the market for gold stocks in the well known names. As they move down the gold stock food chain, there is a small menu of high-quality picks in gold mine developers and gold explorers.
M&A in gold stocks will catch generalist investor attention and we should see more takeovers at significant premiums.
The gold stocks are primed to play a lot of catch up relative to the gold bull market which is looking very powerful and ready to pull generalist investors into the gold and gold stocks bull market.
The last time I saw things lining up like this was at the start of the 2001 to 2011 gold bull market. This time, I expect the bull market to be much stronger as the world returns to the Gold Standard.
It could easily last for a generation or more because this is a major shift that will take many years for the central bankers to back up their debt in a more significant way to make gold the number one world reserve currency and become a big player in world trade.
It’s a good time to be a raging bull on gold and gold stocks.
All the best,
Allan Barry Laboucan
Disclosure
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