Is This the Bottom in the Gold Space?

Written by Gerardo Del Real
Posted May 13, 2019

Is this the bottom in the gold space?

Volatility seems to point to that being the case. The calm before the storm has broken and volatility is back… and it is not isolated.

After months of negotiations, the U.S. and China have escalated the trade war and, though we are always just one tweet away from a major rally, there has now been an escalation in the trade war and there is also now the possibility of military action in Iran.

The timing is — like with all things involving politicians — curious to say the least, with the 2020 election right around the corner and the Trump administration continuing to lobby the Fed for lower interest rates.

The effect of heightened tensions between the world’s two largest economies has already driven global stock markets lower and caused soybean prices to plunge, the dollar to firm up, and the Chinese currency to tumble lower.

China has countered Trump’s decision to raise duties on $200 billion in Chinese products to 25%, up from 10%, by increasing tariffs on more than 5,000 products to as high as 25%.

Farmers are getting crushed, base metal prices have weakened further, and China seems to be hedging itself in the two ways it knows how, by flexing its treasury holdings' muscle and adding to its gold reserves.

China’s central bank added to its gold reserves for the fifth straight month last month.

The Financial Times reported the People’s Bank of China’s gold reserves grew to 61.1 million ounces in April, an increase of 480,000 oz. from March.

That puts the People’s Bank of China’s total gold holdings at approximately US$78.3 billion.

China and Russia have been the most aggressive buyers of gold in the past year and, again not coincidentally, have also been among the most active geopolitically.

Central banks around the world bought $6 billion worth of gold in Q1 of this year, a 68% year-over-year increase according to the World Gold Council.

China’s gold purchases are notable considering they come after a 25-month pause.

Meanwhile, in Iran, a U.S. carrier strike group and a bomber group have been mobilized to the region.

The move is worth monitoring not only because of the human considerations that come with military action but also because of the fact that the Strait of Hormuz — the 21-mile-wide waterway separating Iran from other countries in the Gulf — is the pathway for approximately 30% of the world’s crude oil.

Iran has been clear about its displeasure with any effort made to block the critical path through the Strait.

I’ve told you for months now that gold will be a second-half-of-the-year story and the recent trading action suggests that’s exactly what we’re going to get.

You can likely expect the next several months to see less liquidity in the junior mining space and slightly lower share prices. The kind of price action you see at a bottom.

Great time to add a little bit at a time, not such a great time to sell.

There is a good case to be made that April could be the bottom for the gold price, leading to a seasonally strong June through September.

The biggest downside will be liquidity.

The exception will be companies that get out there, explore, and discover something of significance.

Gold prices have been relatively stable for the past two years, production continues to decline, and the time between discovery and production is increasing.

It’s not a coincidence that we are starting to see M&A among the majors. It’s also not a coincidence that the majors — Goldfields, Newmont, EMX Royalties — are all taking stakes in quality juniors at significant premiums.

This is what bottoms look like. China is buying gold, Russia is buying gold, the majors are taking stakes at much higher prices.

Use the volatility and the pathetic market to add to the best names in the space. These prices won’t last forever and as cliche as it sounds, you can’t sell high if you don’t buy low. This is the low part. Get it done.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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