Gold Plunge: Normal and Healthy
Wednesday, 10/07/2020 09:01
So says this review of gold volatility...
GOLD ended September with its worst week since March, falling some 4.6% to Friday 25th from the previous Friday as the US Dollar staged a rally against the Euro,
writes Frank Holmes at US Global Investor.
The price of bullion closed below $1900 an ounce for the first time since July 23 and was down about 10% from its high of $2075, putting it in correction territory.
I've already seen numerous headlines questioning whether this is the end of the gold rally. Hardly.
As I've explained many times before, corrections such as this are normal and healthy. They're a part of gold's DNA of volatility. During the monster rally of the 2000s that culminated in gold hitting its previous record high of $1900, there were several significant pullbacks, some of them exceeding 20%.
Take a look below. Gold's late-September drop made it more oversold on the short-term, 10-day relative strength index (RSI) than at any other time since the golden cross took place in January 2019.
The last time the precious metal was this oversold, in mid-March, gold fell below not just its 50-day moving average but also its 200-day average. We're not quite there yet, but had you bought the March dip, you would have seen your position increase 40% over the next five months.
Looking at a longer-term period, gold doesn't yet appear to be oversold. The oscillator chart below is based on the daily gold price over a rolling 60-day period, which is equivalent to a three-month quarter.
As you can see, gold has recently fallen out of overbought territory and is returning to its five-year mean, or average price. It's important to remember that for the 60-day period, a move of one
standard deviation is equivalent to 10%. In other words, the price of gold needs to change by 10% to record a move of one standard deviation.
With real interest rates still negative (and likely to remain that way for some time longer), and unprecedented money-printing threatening to heat up inflation, I believe it only makes sense to buy the dips at this time.
That's exactly what many investors did in response to late-September's drop. On the Monday that gold fell nearly 2%, investors added 1.2 million ounces to ETFs backed by physical gold. That was the most for a single day in 2020.
Gold and silver are in "golden times" right now, according to Wheaton Precious Metals' President and CEO Randy Smallwood during an online Denver Gold event last month.
The "helicopter money" from governments will continue to be highly supported of prices. Randy is also optimistic on base metals, saying they are likely to be the bulk of streaming deal opportunities going forward.
"It's good to see money going to the ground in the base-metals space," he commented.
Wheaton Precious is planning to list on the London Stock Exchange by year end, which will put the $23 billion streaming company on the radar of United Kingdom investors who are seeking to gain equity exposure to precious metals. Wheaton currently trades in Toronto and New York.
I believe this is a well-timed decision on the part of Randy, who was named the new chair of the World Gold Council (WGC) earlier this month. According to Edison Investment Research, precious metal companies listed in London "have tended to outperform their peers, with 52% of London-listed companies outperforming the gold price over the period of the worst depredations of the coronavirus so far this year, compared with 39% globally."
Further, Wheaton Precious "will provide premium-quality, geared exposure to precious metals prices and fill a void for investors left by the departure of Randgold Resources in December 2018 after it was acquired by Barrick," analyst Charles Gibson wrote in a note dated September 22.
As you know, Wheaton is one of our favorite mining stocks. At present it pays out 30% of its cash flow in dividends, but this could rise to between 40% and 50% with higher metal prices, Randy says.
Maverix Metals: A Rising Star in the Streaming Space
Another royalty and streaming company we have our eyes on is Maverix Metals, formed in 2016 after the company acquired a package of assets from Pan American Silver. Last week, Maverix entered into a binding purchase and sale agreement to buy a portfolio of 11 royalties from Newmont, including the Camino Rojo gold and silver project in Mexico.
The transaction, according to a note by Raymond James, "provides Maverix with potential near-term gold equivalent ounce (GEO) and cash flow growth from five development assets in the Americas, while adding longer-term optionality through the six exploration properties."
Raymond James has given the stock an Outperform rating, with a price target of C$7.50.
We like the stock and, based on our quantamental stock-picking model, have recently added it our portfolio. This replaced Australia-based producer OceanaGold. Maverix' gross margin overtook OceanaGold's in 2019 and has only continued to increase, which is why we made the rotation.
Since it began trading in July 2016, Maverix has outperformed OceanaGold and other global gold stocks.
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JPMorgan to Pay Record $1 Billion Spoofing Penalty
On a final note, some of you may have heard that JPMorgan & Chase, one of the world's largest gold and precious metal traders, is set to pay close to $1 billion to resolve market manipulation investigations by US authorities that have been ongoing for months now. The settlement would allow JPMorgan to continue normal operations without being indicted.
Two former JPMorgan traders are being alleged of "spoofing," or placing false orders with no intent to execute them to trick others into moving prices in a desired direction.
Unfortunately, market manipulation in the global gold market is real, but there are those who are fighting to expose it. If you recall from May of last year, I interviewed Chris Powell, secretary/treasurer at Gold Anti-Trust Action Committee (GATA).
We briefly discussed the JPMorgan spoofing scandal, during which Chris shared an interesting thought on John Edmonds, one of the traders: "He was allegedly doing it with the knowledge and counsel of his superiors, and if it were done on behalf of the government, presumably it's legal under the Gold Reserve Act...[But] I can't imagine the Justice Department would be prosecuting him if his trading was being conducted on behalf of the US government."
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