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Thinking Through The Blahs

It’s so important to have friends in the business. That statement stands in many situations! Right now I’m referring to friends in the same sector with whom you can trade ideas.

COVID made many of us annoyingly efficient ;) as working from home eliminated commuting and coffee break chats and extended meetings and conferences just as not going to restaurants or shows or vacations or even friends’ houses left more time for work. And there were benefits from that.

But there were also drawbacks. I love conferences. I love them because I spend most of my time at my desk, reading and researching, and thinking. All of that alone time is essential in crafting my ideas and outlooks but trading ideas is also very important. And when you work with good people and have a good network in your sector, you get the chance to trade ideas every time you visit an office or set foot in a conference hall.

I had a great chance to trade ideas yesterday. It was simple, just having lunch with a friend who puts significant time into investing in the junior mining sector. We started with the blahs – how frustrating it is that gold and silver are sliding, when those slides will turn around, how the wait feels like a grind.

But then we kept talking. We thought about how this gold/metals market has played out, with a timeline that is darn similar to The Big Bull of 2004 through 2010. That market started with a rise from the bottom in 2003, a sideways slog for 18 months from early 2004 to mid-2005, a strong run for early 2006, another slide and sideways grind for 18 months until late 2007, and then it was game on. Yes, the GFC derailed the run in 2009 but that global crisis ended up only a blip for gold, which regained its upwards trajectory within six months.

How has this market gone? A rise from the bottom in 2016, a slog for 30 months, a strong run starting in early 2019 that lasted 18 months, and now we’re in another sideways grind and slide that has lasted 13 months to date.

Get started, then slog for a long time (18 months last time, 30 months this time). Go again, then endure another slog before the real market takes off. It happened in the last bull market. In fact, as the chart below from Jordan Roy-Byrne of TheDailyGold shows, the markets started charting parallel paths several years before their upturns began (the chart shows the price of gold from 1996 to 207 in blue and from 2012 to today in black).

Does that matter? On its own, no. There are so many forces that influence gold that past gold market patterns are by no means gospel. But it is interesting to note the repeating pattern. It is also helpful for those of us struggling with the Blahs to see that this second slog is part of that pattern and usually ends within 12 to 24 months. (I say ‘usually’ because there have been similar patterns in previous gold markets.)

We’re 13 months in now (since the gold price peaked in August 2020). So the pattern suggests gold will go again (for real this time!) in the next year.

What I like about that timeline is how it jives with what’s going on in the world.

Last week Fed Chair Powell outlined a reasonably aggressive schedule for the Fed to wind down its $80 billion a month in bond buying, saying the taper will start in November (as long as things remain about as they are) and be done by mid-2022. Such a schedule would have the Fed buying $10 billion less in bonds each month for six months. I have seen several articles arguing that the market will accept tapering this time (including this hilarious and detailed article that uses the tapir as the analogy – worth a read) but I don’t buy it.

Why would the market tolerate tightening? Perhaps a touch is tolerated but I can’t fathom the Fed actually being allowed to pull back its bond-buying program that aggressively without traders having a fit. And looking beyond – even if the market tolerates tapering, is it also going to accept rate hikes? Because that’s the Fed’s plan – first taper, then hike – and I really can’t imagine that going over well.

All of this – tapering and, should we get to it, talk of hiking – will play out over the next year. As I’ve made clear in recent weeks, I don’t think we’ll get to rate hikes because the market will have another taper tantrum and force the Fed to backtrack. Should tapering somehow earn acceptance, it will only postpone the tightening fit to rate hikes, the first of which is now ‘scheduled’ for roughly this time next year.

Tightening makes things harder. That’s the whole point: the Fed is supposed to step back from buying bonds and start raising rates to let the economy stand on its own, for starters, and then to fight inflation from hot growth. Tightening makes it harder for large-cap stocks to issue new debt, carry the debt they have, and spend confidently on growth. It tamps things down.

But no one in the market wants things tamped! Traders want this endless bull market to continue. And there are oodles of reasons to argue that inflation, while clearly present, is not because of hot growth but because shipping is all messed up, or there aren’t enough truckers, or ongoing COVID supports are screwing up the job market, or Brazil is having a terrible drought, or energy prices are spiking because of Brexit or low water levels in Norway, or or or. Those alternate explanations give traders a reason to fight tightening (that isn’t just We want more easy portfolio returns) and give the Fed an excuse to backtrack if needed.

Now the inflation question is a very real one. I don’t remember where I read it but in an article on the petrol shortage / soaring energy and natural gas situation in the UK and Europe right now, someone commented: There’s a limit to how many price shocks we can continue to describe as one-offs. The comment really resonated with me. We’ve seen price shocks in lumber, copper, met coal, natural gas, and now oil in the last year, to name a few; at some point they stop being coincidental and become connected.

With these thoughts in my head, I found the set of charts below, courtesy of Canaccord, interesting. They show how capex – spending on new production – has been sideways for gold since the bear market and has fallen in a wave pattern over the last ten years for both oil and copper. Prices, meanwhile, are headed the other way. The analysts presented the chart as part of an argument that low/falling capital spending across the commodity space has set the stage for higher prices – inflation if you will – because growth has not been built in.

And with prices now surging on the energy front the impacts are very real: higher energy prices hit the bottom line for everyone, from households to huge businesses, and so have real potential to slow growth. The chart below shows the price for natural gas for delivery within a month in the Netherlands. That’s a ramp, alright.

Inflation from structural forces (insufficient capital investment, for instance) persisting and stymieing growth – that, my friends, is stagflation. Inflation without growth is a dangerous combination because it erodes purchasing power without delivering the growth that creates new jobs and enables higher pay.

I don’t know if we’re heading to stagflation but it’s certainly a possibility. And it would be great for gold.

To not end up in stagflation, we have to either:

  • Have growth alongside inflation, as we have had. Gold would work here in its longstanding role as an inflation hedge. It would work especially well if market tantrums keep tightening limited in such a situation, as that would keep real rates well and truly negative.
  • Have neither inflation nor growth. This seems unlikely from where we stand today unless the Fed charges ahead with tightening no matter the consequences. The way the yield curve flattened after Powell outlined his taper timeline suggests traders do not think the economy can support that much tightening. And that’s just tapering. This would be mixed for gold: good with initial tightening, bad with further tightening, then good again as the proverbial crap starts hitting the fan.

To bring this all back to where I started: all of these possibilities will play out over the next 12 months. The outcomes range from mixed (with the least likely scenario) to good to very good for gold. And 12 months is the timeframe in which past patterns suggest gold should make its next move up.

As my friend and I worked through all of this together, we got happier. Why? Because we are in. Of course, we want the gold market to start tomorrow but renewing our confidence that it 7 will very likely start in the next 12 months means our gold-leaning portfolios will shine, as will every portfolio that is in gold.

Rick Rule has kicked out a lot of memorable quotes over the years and one comes to mind now: First comes the easy money – you just have to be in. Next comes the big money – for that, you have to stay in. As for what to do while we wait… Uranium?!? I joke, but I’m also serious. I think uranium could well run over the next 12 months and, in doing so, would fill the gap until gold is once again good.

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I'm one of your new subscribers (by way of and just want to belatedly thank you for the recent sell recommendation that saved me quite a bit of money. (I also follow a few other mining newsletters, and, like so many other financial analysts, they were too hesitant and biased against putting out sell alerts.) And I find your newsletters very nicely done in general.

Kind regards!

-TA (April 6, 2020)

Gwen, you are truly a beacon of sound thinking and honest insight in a market sector full of charlatans.

-AH (September 2022)