Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Leads, Will the Rest Follow?

Commodities / Gold & Silver 2019 Sep 21, 2019 - 09:51 AM GMT

By: The_Gold_Report

Commodities

Fund manager Matt Geiger provides his overview of the resource market and shares some principles he is using to invest in today's market. The natural resource landscape has shifted dramatically since the end of 2018. At the time, we were still nursing our wounds from an unexpectedly vicious 2018 and hoping to avoid a repeat performance in 2019. I did speculate that "we may have already exited the bear market as of late December 2018. The nickel price is up roughly 25% YTD, the gold price is up roughly 10% since early December, the TSXV is up 15% since mid-December, and the MJG partnership itself was up 20.5% in January alone."

In hindsight, it looks like we did indeed exit the bear market as of late December 2018. The nickel price is now up 54% YTD. The price of gold is now up 25% since earlier December. The MJG partnership was up 42% in the first half of the year. The major diversified miners have hit 52-week highs within the past 60 days. The major precious metal royalty names have hit either multi-year or all-time highs recently. The same applies to the GDX and GDXJ. These are the types of moves you'd expect to see in a mining bull market.


While other metals such as nickel and iron ore have also seen sharp price increases this year, the stars of the show have been gold and its sister metal silver. In June, the gold price rallied sharply above $1370—breaking through a stiff technical resistance level that had existed since mid-2013. The gold price has since continued its ascent to above $1500 and currently sits at $1505 per ounce. This move has been driven primarily by generalists re-positioning into precious metals after nearly eight years of neglect, though it should be noted that the big Wall Street institutions remain largely on the sideline (as demonstrated by the GLD Inventory to Price ratio often cited in the IKN Newsletter). This lack of Wall Street participation is a positive as far as I'm concerned and indicates that this move may be more sustained that the short-lived, euphoric rally that we experienced in 2016.

The most devastating argument used against owning gold is that the metal sits in a safe deposit box and generates no interest. The opportunity cost of holding gold is too high, argues its critics, given that there are plenty of other safe haven instruments in which to shelter capital and still earn interest. To be fair, this anti-gold stance was the correct call for much of the past eight years.

However, this argument has been flipped on its head over the past nine months due to a global surge in negative-yielding debt. The market value of global negative-yielding debt has surpassed $16 trillion for the first time in history. A staggering 30% of investment grade bonds globally now yield below zero. (This includes government, corporate, and securitized.) As seen in the chart below from Bloomberg, there was virtually no negative-yielding debt as recently as five years ago. This is a very new phenomenon.

Source: Bloomberg. 1 August 2019. https://www.bloomberg.com/news/articles/2019-08-01/sub-zero-debt-pile-hits-record-14-trillion-as-fed-cuts-rates

This is astounding when you think about it. Why would an investor pay somebody else to hold their money? It simply doesn't pass the smell test. Suddenly, a shiny rock sitting in a safe deposit box paying 0% interest looks very attractive relative to this alternative. The strongest argument against gold has now become the chief justification for owning the metal.

As one would expect in a bull market, silver has outperformed gold over this recent period. It is possible, if not likely, that we saw a peak in the gold to silver ratio at just above 93 in early July. Assuming that this bull market continues apace, we can expect this ratio (now sitting at 85) to trend lower over the months ahead. The historical average during the 20th century was a 47:1 ratio; we have been due for some time for a significant mean reversion.

While the immediate future looks bright for precious metals, the outlook is murkier for much of the rest of the commodities complex. U.S. farm income remains roughly 50% below its 2013 peak and, while farmland is due for a multi-year bull market, the immediate future depends more on U.S./China trade war dynamics than anything else. Industrial metals like zinc have struggled mightily over worries of a global slowdown, despite record low inventories and limited expected supply growth. Energy metals such as uranium, vanadium, lithium and cobalt are particularly hated as investors have cooled for the moment on the electrification narrative.

My expectation is that the rest of the metals complex will begin to play catch up sometime within the next 12 months. This scenario hinges on the global economy holding together and not dipping into a sustained recession. If I'm wrong on this account and we do see a sustained global recession, then precious metals equities will surge from current levels—to the detriment of base metals, energy metals and much of the rest of the natural resource arena aside from farmland. In a worst-case scenario, we see another 2008-like financial panic where all risk assets are sold off indiscriminately. Even though the price of physical gold would likely skyrocket during such a panic, this would not be to the benefit of those invested in precious metal equities—at least until the initial panic subsides.

Given the variability in potential outcomes, the best course of action is to stick to the basics. Continue to back experienced, well-incentivized management teams—irrespective of whether they are focusing on precious metals, base metals, energy metals or any other commodity. Prioritize high quality "in the money" projects over optionality plays, even when temptation exists to bet on $2,000 Au and $30 Ag. Avoid stocks with less than twelve months of working capital and mercilessly sell holdings that deviate from their stated plans. Average down when a company's share price falls but the investment thesis remains intact. Take profits when a company's share price doubles without a fundamentally positive development. The list goes on. None of this is particularly complex or groundbreaking, but by doing these simple things we set ourselves up for long-term success—irrespective of how the rest of 2019 unfolds.

Matt Geiger is Managing Partner at MJG Capital, a limited partnership specializing in natural resource investments. The partnership is long-only and holds a concentrated portfolio of resource equities. Investments include explorers, developers, and producers of energy metals, industrial metals, precious metals and ag minerals. Geiger is a graduate of the Wharton School at the University of Pennsylvania and previously founded a venture-backed technology company recently valued at $150 million.

Disclosure: 1) Statements and opinions expressed are the opinions of Matt Geiger and not of Streetwise Reports or its officers. Matt Geiger is wholly responsible for the validity of the statements. Streetwise Reports was not involved in any aspect of the article preparation. The author was not paid by Streetwise Reports LLC for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. 2) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports. 3) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article, until one week after the publication of the interview or article.

Charts courtesy of Matt Geiger.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules