Heads Gold Wins, Tails Gold Wins, But The Serious Torque Is In High Quality Gold Stocks
There are plenty of factors aligning for the depressed gold stocks to join the golden party.
Seasonal trends are also giving us a green light. Gold and gold stocks are showing a solid Santa Claus rally. Which portends a strong opening week of January which is a good indicator that the January Effect for gold and gold stocks will be bullish.
I pay a lot of attention to these seasonal trends as money managers at this time of the year review the year that is ending and what they expect for the year ahead. They want to position themselves for assets they think will have a strong year ahead. If they are right and get positioned ahead of the crowd, it can put them in a good position for inflow of funds. These are the reasons that the January Effect is often an exceptional indicator of the year ahead.
Another seasonal trend that comes into play this time of the year for the smaller gold stocks is tax loss selling season. Once the tax loss selling ends in late December, there is often a significant bounce in the first couple months of the new year. That bounce can be positively influenced if the January Effect for gold and the larger gold stocks is bullish. I have a feeling this is what we are seeing happen in real time.
To confirm this is happening, we will want to see gold and gold stocks continue bullish action through the Christmas and New Years holidays and then into the first week of January.
Things are shaping up nicely, gold is on the verge of breaking through $2100 and that will likely be one of those hurdles that brings in a surge from a shift to more bullish sentiment for gold and gold stocks.
The Chinese and Indians are long term gold buyers, the central bankers have been increasing their reserves of gold since the 2008 global financial crisis. The central bankers ramped up their buying in 2022 for a record in this trend and 2023 looks to be a new record. I won’t be at all surprised if 2024 is a new record.
The central bankers understand how damaging the Free Money Era since 2008 followed by rapid increases to rates is for debt. The Fed and prolific spending by the politicians has truly caused a Death Spiral of Debt.
Which can only be stopped by the Fed dropping rates back to near zero and the politicians cutting spending and increasing taxes. There is zero chance the politicians will do what is needed and the Fed has no choice but to lower rates or cause an economic depression. They will choose to keep the Ponzi scheme alive, especially in an election year, which will result in the debt problem only getting worse.
The Fed is not alone, most central bankers have followed in their footsteps. At least several of them are realizing that they need to return to somewhat of a Gold Standard. They are reducing their US debt and US dollar holdings and increasing their reserves of gold.
This is a smart move, but I don’t think they should stop at gold. Silver is an excellent option to increase reserves of, it is much better than sitting US debt and US dollars. They should also increase strategic reserves of other crucial metals, at a minimum to the level that they need for their own domestic demand.
It is not surprising that several of the central bankers seeing the writing on the wall and increasing their gold holdings are member countries in the BRICS network. They are motivated to do this for two reasons. One is that they eventually will want an alternative to the US dollar as the world reserve currency. They may have ignored for decades treasury secretary John Connaly in 1971 at the G10 meeting telling finance ministers, “The dollar is our currency, but it's your problem.”
They are not ignoring that proclamation any longer and are taking actions to make it less of their own problem by building up their reserves of gold.
I doubt a competitor to the US dollar being the world reserve currency is going to happen any time soon. What I do think is happening in real time is they are making moves to make the US dollar less dominant for world trade. They are already making agreements to use their domestic currencies for more trade. I believe that gold will play an increasing role in world trade.
When the gold ETFs came out, they consumed a lot of physical gold. I see two sources that could be just as significant.
One is the World Gold Council creating a digital product that will hold gold. One of the issues with buying gold for average consumers is it is not particularly easy. This product will make it easy for many people to buy gold. This will give investors that believe in digital currency and like buying it online, much easier access to a similar asset that is backed by gold. I believe this will bring in a lot of momentum traders.
Secondly, I’m extremely impressed at how much gold Costco is selling, especially considering that members are restricted by only being able to buy 2 ounces. The demand with these restrictions is still able to sell out within a couple hours of putting them on sale. Their leadership has recognized the demand, they are brilliant marketers and I’m certain they will increase this business in a big way.
As these two sources of demand are in full force, I don’t think it will take very long before these same investors make their way into gold stocks. Even a small fraction of these investors moving into gold stocks will have an impressive impact because the gold stocks are coming from such low bases.
Plenty of factors are lining up for gold to increase dramatically in price and the gold stocks to reduce the divergence between gold and gold stocks.
All the best,
Allan Barry Laboucan
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