The Fed Gets Dovish Which Pushed The US Dollar Down And Drove Gold Higher
It looks like the shorters of gold stocks should get worried.
Earlier today, I did an interview with Ewan Downie, the CEO of i-80 Gold. During our conversation he brought up an important topic when he mentioned that a lot of gold stocks have big short positions.
I’ve mentioned many times about the parallels I’m seeing between the years 1999 and 2000 to now. The high short positions on gold stocks (the declared ones, there are likely significantly more undeclared shorts) reminded me of back in the early days of the 2001 to 2011 gold bull market. Back then a lot of the major gold miners had very big hedge books that worked like a short on gold.
When gold was down, they looked brilliant because they could sell gold at the attractive prices they locked in at higher prices with their hedges. But, then when gold went above their hedged prices it worked as an anchor on their stocks. Especially because they went overboard with several years of their production hedged.
They could see that gold was likely going higher and they unwound their hedge books taking serious losses. They wanted to join the gold bull market as they were tired of underperforming the bullish moves in gold.
When they closed their hedge positions it added fuel to the fire of the gold bull move. They say history doesn’t always repeat, but it often rhymes. The major miners learned their lessons and have avoided hedging production like the plague. They may have learned their lessons, but the shorters of many gold stocks didn’t.
Sure they look brilliant shorting gold stocks, including major miners, mid-tier miners, developers and explorers, while they are trading at depressed valuations. If the majors could be punished for their hedging, the shorters of the gold stocks can as well.
When gold started trading higher than the gold miners’ hedges, it was the catalyst that brought lots of pain to the hedgers.
Gold stocks are currently at depressed prices, they are at a very low base and trading on low volumes. At the same time, gold is gaining strength having had its first monthly close above $2000 in November, followed by the highest daily close on December 1, then the highest ever price on the futures market over a few days.
The Fed meeting yesterday, is in my opinion a seminal moment for gold. They kept the pause of raising rates going at another meeting. The striking part was when Powell was asked about when they would cut rates. The reporters caught the change in tone and made most of the question and answer period about the possibility of rate cuts.
It was a remarkable change in posture for Powell. It came after Janet Yellen said that she wasn’t worried about the debt situation. The translation is that she is worried about debt. I don’t blame her as the US is in a Death Spiral of Debt.
The spiral was caused by the Free Money Era after the 2008 economic collapse that continued until 2022 when the Fed jacked up rates rapidly to make money expensive.
They painted themselves into a corner they can’t get out of. They caused the Ponzi Scheme of building the economy on debt and cranking up the money printing press and will have to keep dealing with it.
The Fed is not supposed to be politically motivated, which is far from the truth. It is not a coincidence that in the last meeting of the year, just prior to next year being an election year the Fed gets miraculously dovish. After two years of being hawkish, coincidence, methinks not.
The gold traders liked the dovish Fed. Many can see the Death Spiral of Debt is a huge problem as servicing the debt is over $1 trillion. Made worse by the politicians racking up more debt since raising the debt ceiling to get it over $34 trillion.
At the rate they spend money, it won’t take long for debt to be 150% of GDP. For those playing at home, that means for every dollar of gross domestic product, you need a buck and a half of debt.
I’m not the sharpest tool in the shed, but I can easily see that is not sustainable. That is the kind of thing you see in basket case economies, it is a massive problem when the largest economy in the world is in that predicament.
The politicians are acting as if the Free Money Era never ended. They are spending to the tune of a $2 trillion deficit which will only grow higher. They don’t know how to stop spending and once they are allowed to have a $2 trillion deficit they will want $3 trillion.
With interest rates where they are, the cost of servicing the debt will likely be $2 trillion faster than anybody seems to think.
The hawkish days of the Fed are over and next they move from dovish comments to dovish actions to lower rates. The dovish comments alone pushed the US dollar down, and gave gold, silver, copper and other commodities some wind in their sails.
The trend for interest rates to drop and put pressure on the US dollar is just starting to get friendly for gold and other metals. Now that the Fed is making dovish comments, while chronically wrong Yellen is saying don’t worry about the debt which really means she is worried, and 2024 is an election year, the Fed is without a doubt preparing to be accommodative by lowering interest rates. It is clear the times they are a changin.
It sure looks to me like the bearish trend for the US dollar and bullish trend for gold and other metals will continue because once the snowball starts going down the mountain it gets bigger and keeps going.
Ultimately, this is shaping up to be the catalyst that squeezes the gold stock shorters. They had a good run making easy money. But as is often the case, easy money turns into hard to make money and then losing money. The easy money period is ending, next it will get more painful for the shorts.
They learned nothing from the gold mining hedgers a couple decades ago. But, Mr. Market has a way of causing pain for foolish moves. To short gold stocks into record lows is a foolish move caused by making easy money. Especially when they have helped cause a massive divergence between gold stock valuations and gold.
How I see this playing out is that they will first unwind their shorts in the biggest gold miners as they are the most liquid and it will be mildly painful. As they move down the food chain of gold miners into the smaller miners, developers and explorers, it will get more painful and could cause some panicky action.
I have a lot of respect for Ewan Downie, he is a serial mining entrepreneur. He built Wolfden Resources from a small company that ultimately was bought out. Before they were bought out, they spun out their gold projects into Premier Gold and then built that from an explorer into a miner and it was bought out. As part of the Premier Gold takeover, they spun out the company’s Nevada gold projects to create i-80 Gold a couple years ago.
He is a very talented deal maker, he has been exceptionally good at buying assets on the cheap and then enhancing them with the drill rig. He has done that with i-80 Gold, by enhancing the Cove-McCoy project, the Granite Creek project and the Ruby Hill project. All three have a common denominator, they are all high-grade.
Another key asset is they bought an autoclave which enables them to process sulphide material. It is not lost on me that Ewan points out that the easy to find low grade open pit oxide deposits in Nevada have been found. In the future, there will be a transition to going below the oxide deposits into the sulphides under them to mine gold in Nevada.
Nevada Gold Mines, the joint venture between Barrick and Newmont, and i-80 Gold are the only ones to have processing facilities that can process sulphide materials in Nevada. This is a key strategic asset that puts them in a unique position. If an explorer or developer has a sulphide deposit, they will need to be able to process it.
The autoclave they have, would easily cost north of $1 billion to build, which is much higher than i-80 Gold’s current valuation. When you look at their various assets, which they have put together in the short couple of years they have been public, they have paved the way to grow into a much bigger company.
I’ve known Ewan for nearly twenty years, all three of his companies have been sponsors of my reports. He is the biggest supporter of the work I do researching and reporting on the mining sector and the companies I follow.
I’ve had a front row seat for his succcesses and have learned a lot from watching him closely. We also often talk privately often about the sector and projects. He is very astute at assessing projects and following what is happening in the gold market.
I’ve learned a lot from him over the years, as has my audience. He often drops nuggets of wisdom during our many interviews. We do many interviews because i-80 Gold regularly puts out impressive news.
When he mentioned the high short positions in gold stocks, including in i-80 Gold, it wound back the clock for me to when major gold miners had large hedge positions. When they closed those hedge positions it was very bullish for gold. I’m looking forward to seeing what happens when the declared shorts, and undeclared shorts on gold stocks have to buy the gold stocks to close their short positions.
I will put out the interview I did with Ewan tomorrow.
All the best,
Allan Barry Laboucan
Rocks And Stocks News does not make buying or selling recommendations. The reports are for information purposes only. Sponsors pay a fee to Rocks And Stocks News for content creation. This funding helps cover the costs of research and reporting on the sponsors and picks that aren’t sponsors. Before making any investment decision it is important for you to speak with your financial advisors to consider your risk profile. It is also important to do your homework. To help in that process, Rocks And Stocks News means to be a gateway by doing reports and interviews of management of sponsors and picks. The reports and interviews should not be considered investment advice. Allan Barry Laboucan is the founder and owner of Rocks And Stocks News, he has worked in the mining sector since 1993 and has been reporting on the sector since 2005. He has worked with and been mentored by very talented geoscientists in geology, geochemistry and geophysics. He uses the skills he has picked up during his career to assess sponsors and picks in the reports. Whether a company is a pick or a sponsor they go through the same filter and are reported on when important news is made that Allan Barry Laboucan wants to discuss on the Rocks And Stocks News platform. He may own shares in sponsors and picks for investment purposes.