Mike Fagan,
Editor
April 1, 2022
Gold loves volatility. It’s where we are… and it’s where we’re heading!
The yellow metal is also an inflationary hedge. And at 7.5% CPI, we’re experiencing the highest rate of inflation in four full decades.
We’re also at $100-plus-per-barrel oil. We haven’t seen oil prices that high since 2014.
Unfortunately for most of us, that means more pain-at-the-pump as gasoline prices have never been higher in this country.
Dammit… shoulda bought that Tesla!
The trickle down effect is everywhere you look in the form of higher prices with literally no place to run or hide.
Well, except for gold that is!
Since the start of the current calendar year, the yellow metal has surged from US$1,800 to currently US$1,940 per ounce. It even briefly broke above the critical US$2,000 mark earlier this month before pulling back to US$1,908/oz.
Prior to that, the last time gold breached US$2,000 was in August 2020 during the initial COVID surge where it posted a record high of US$2,051 per ounce. In other words, from where we sit today, we’re not far off of gold’s all-time high.
Importantly, when gold spiked above US$2,000 earlier this month, it was building off of a base of around US$1,800 an ounce.
Since that interim peak, gold has established a new higher base at US$1,900/oz. And that’s key as the next surge above US$2,000 will likely serve as a launchpad to much higher prices.
And even if gold isn’t setting new all-time highs in the second half of this year, that newly established base of US$1,900 is, by all measures, historically strong. It’s at a level where the vast majority of gold producers around the world are able to mine at a profit, which, of course, is positive for gold stocks.
A tightening Fed is also highly bullish for gold. In an ongoing effort to rein in the rampant inflation it wrongly labeled as “transitory,” Powell & Co. made the move to raise rates two weeks ago — for the first time since the onset of the pandemic — by 25 basis points.
The median expectation is now for seven 25-basis point hikes for 2022, which would bring the fund’s rate up to 2.8% or about 100 basis points higher than what was expected just three months ago.
Time will tell if the Fed is able to get anywhere near that level of raising as recessionary fears loom.
We watched this exact scenario play out in 2015 as the Fed took on a tightening posture. Gold rose about 30% in the eight months following the first rate hike of that tightening cycle.
At today’s gold price of approximately US$1,940 per ounce, a 30% rise would put the yellow metal at US$2,500 — an all-time high plus some!
A close colleague of mine, Jordan Roy-Byrne of The Daily Gold — a renowned technical analyst — believes we could see US$4,000 gold in 2024!
Hence, a consensus is now forming that the gold bull run that began in earnest in 2016 is poised to move into its next, even stronger phase.
No matter what heights gold attains in the next 12 to 36 months, I believe the greater risk is NOT being invested in the gold sector at this particular juncture.
Silver stocks are similarly poised to do well as a double in the gold price would likely mean a silver price north of US$50 per ounce — from currently US$25 per ounce.
But what’s the best way to maximize gains in the gold stock sector?
There are several ways to play. One, you can invest in the lower-risk major and mid-tier gold producers. These companies’ bottom lines are directly linked to the price of gold. Stocks in this category can double — or do slightly better — in a rising gold market.
Next, we have the junior gold stocks. The juniors have the potential to rise in true exponential fashion — really, in any gold market — but they also carry the highest degree of risk.
That’s because the vast majority of juniors are focused on early-stage exploration where drill results mean everything. A world-class drill intercept can literally take a junior from pennies to a dollar… whereas a “drill-miss” can sometimes be the death knell for an under-funded junior with limited drilling and funding prospects.
As a reader of Daily Profit Cycle, you probably already know… our own Gerardo Del Real does a fantastic job navigating the junior sector for his paid subscribers.
One area of the gold sector that offers the best of both worlds in terms of large potential upside with lower downside risk are the royalty & streaming companies.
In this subsector of the gold space — where companies purchase royalties and streams on a mining company’s production — speculators are provided with discovery, development, and commodity price optionality while limiting exposure to the risks inherent in running a mine.
To clarify, a royalty is when a mineral producer agrees to pay a certain portion of its production revenue to the owner of the royalty (the royalty-streaming company). A stream is where the mineral producer sells physical metal to the royalty-streaming company at a percentage of spot.
As a speculator, the royalty-streaming model provides exposure to the commodity being mined — in this case gold — along with leverage to rising gold prices. It also provides upside to resource expansion and mine-life extension without any of the risks involved in operating a mine.
Better yet, the gold producer MUST pay the royalty-streaming company the agreed upon terms regardless of what gold prices happen to be doing at any given time.
Royalty-streaming companies come in all shapes and sizes… including the juniors and mid-tiers… as well as the majors such as NYSE-listed Franco-Nevada and Wheaton Precious Metals.
For those interested in learning more about the space… here’s a newly-listed junior precious metals royalty & streaming company with eight producing assets and a paying dividend.
With turmoil and volatility ruling the day… now’s the time to be invested in the world’s only true safe-haven metal — gold!
Mike Fagan
Editor, Daily Profit Cycle