The sharp drop in the gold price last week dragged the stocks down even further to where many are compelling value (as indicated by the length of the "best buys" list below). In last week's Bulletin, I wrote that the widening gap between bullion and gold stocks could be closed by gold declining. "I would argue that in a global environment which has seen interest rates shoot up rapidly with continuing tightening in the outlook as well as a deteriorating economic environment, gold ‘should' be lower."
I hope I didn't jinx it and provoke the one-week, $78 drop! The market finally seems to have given some credence to Jerome Powell and the Federal Reserve.
At the last meeting, though there was no rate hike, Powell reiterated his hawkish stance, while the Fed members (in the so-called "dot-plot") are still projecting another rate hike this year, and they increased their estimates for rates next year.
This seems to have got the market's attention, as the Fed Funds Futures are now more weighted to a hike this year. More importantly, perhaps, market rates have moved up, along with a stronger dollar.
Bond Yields Must Go Higher
Market rates are likely to move up further. The Treasury is still playing catch up in bond issuance after the debt ceiling agreement in June, with perhaps as much as half-a-trillion additional bonds to be issued this year. That will withdraw liquidity from the economy, hurting gold. This comes as traditional key buyers, including the Federal Reserve itself, and China, Japan, and Russia are not buying, requiring higher rates to attract new buyers. In addition, almost one-third oof all Treasuries outstanding will mature over the next 12 months, requiring the Treasury to issue new bonds at today's higher rates.
The report Friday that Saudi Arabia was seeking a stronger military agreement with the U.S. led to suggestions that this could mean more cooperation on the oil price and, potentially, a stalling of the advance to de-dollarization of global trade. Both of these would be gold-negative.
If the Fed blinks even as the inflation numbers are moving back up, that would be very positive for gold.
There are certainly factors that could see gold even lower before the end of the year. Another Fed rate hike would likely hurt gold, despite the Fed Funds Futures. On the other hand, the Fed is unlikely to hike during a government shutdown, while the automobile strike might suggest caution. And, of course, if inflation numbers move down again, that would provide a reason to pause
What we can say, however, is that we are getting very close to the point where conditions will favor gold. The U.S. economy is moving towards a recession, while the recent jump in the oil price will flow through to most goods in the stores, boosting the CPI numbers in the months ahead. That combination — stagflation — is positive for gold.
A slowing economy ahead of the election, even as payments on the Federal debt rise sharply, will also suggest the end of hiking. If the Fed blinks even as the inflation numbers are moving back up, that would be very positive for gold.
Stocks Very Low Amid Weak Sentiment
Meanwhile, investor sentiment is extremely negative; gold ETFs continue to see larger outflows. From a contrarian point of view, that suggests that the eventual rally will be all the more strong. Retail interest is higher, as evidenced by Costco now selling one-ounce gold bars, which the company says typically sell out "within a few hours."
The gold stocks remain very undervalued. We could look at many indicators of value. For one, the GDXJ fund is four standard deviations below the level implied by a 10-year regression model, a measure of price rather than value to be sure of a very unusual occurrence.
The seniors are at multi-decade low valuations as well. Of course, the stocks will fall further if the gold price does, but we are close, in terms of price and time, to the lows, and today's prices will look very low a year or two from now.
More Trouble in Panama for Franco
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) sees more uncertainty over its largest asset, the stream on First Quantum's Cobre Panama mine, less than a year after the mine was temporarily shut down amid rancorous renegotiations of its agreement with the government. That agreement was in the news again when the National Assembly suspended debate on its ratification amid demonstrations by a workers union protesting against the proposed agreement.
However, this may be a tempest in a teapot: the union does not represent any mine workers, while the Assembly's objections to the new agreement do not appear to concern any central financial issues.
A resolution in the near term is likely. Meanwhile, the mine continues to operate.
We do not expect this new dispute to have a meaningful impact on Franco's share price, which is at a good buying price in any event.
Nestlé Sells Troubled Asset, Buys Another
Nestle SA (NESN:VX; NSRGY:OTC) has sold Palforzia, its troubled peanut-allergy treatment, to a Swiss biopharmaceutical company specializing in the treatment of allergies. The price was not disclosed, though it is widely thought that Nestlé lost a significant amount of the $2.6 billion it paid to acquire the business in 2020 amid hopes of a blockbuster therapy.
Demand from both patients and doctors was disappointing. Earlier this year, Nestlé took a $2.1 billion impairment on the medication. Mitigating the loss, Nestlé will receive milestone payments and ongoing royalties. In other news, Nestlé has acquired the majority stake in Grupo CRM, a premium chocolate company in Brazil, which operates more than 1,000 chocolate boutiques, including under the Kopenhagen name, ubiquitous at the country's large airports and malls.
As with the Palforzia sale, this transaction was with a private company, and financial terms were not disclosed. Separately, Nestlé ranked first in coffee sustainability in the new Coffee Brew Index, with the report recognizing the company's comprehensive coffee sustainability strategy, which includes help in modern techniques for coffee growers.
Despite its large portfolio of businesses, Nestlé has shown itself to be flexible while achieving consistent returns. With a solid balance sheet and forward yield of almost 3%, it's a long-term Buy.
BEST BUYS THIS WEEK include, in addition to above, Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), Barrick Gold Corp. (ABX:TSX; GOLD:NYSE), Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE), Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ), Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE), Lara Exploration Ltd. (LRA:TSX.V), Orogen Royalties Inc. (OGN:TSX.V), Midland Exploration Inc. (MD:TSX.V), and Nova Royalty Corp. (NOVR:TSX.V).
UPCOMING APPEARANCES November 1st to 4th is the annual New Orleans Investment Conference. Always educational, challenging, and fun, it is a must-event on my annual calendar. Speakers, too many to list, include Peter Boockvar, a walking almanac of all things economic; Robert Prechter, George Gammon, and the alwayscontroversial Prof. Dave Collum.
One recent addition to the line-up is Russian-born, U.K.-based satirist Konstantin Kisin, whose speech on cancel culture at the Oxford Union went viral. I am honored to say that I'll be interviewing him. Details can be found here.
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- As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Franco-Nevada Corp., Agnico Eagle Mines Ltd., Barrick Gold Corp., Pan American Silver Corp., Fortuna Silver Mines Inc., Lara Exploration Ltd., Orogen Royalties Inc., Midland Exploration Inc., and Nova Royalty Corp.
- Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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