While Stocks Climb Underlying Issues Persist That Could Drive Gold Prices Higher
This week, President Donald Trump and Steven Mnuchin (Treasury Secretary) outlined certain measures for a fiscal stimulus. These will be further discussed with Congressional legislators to help cushion any potential downturn in the economy. Obviously, the brunt of which is from the coronavirus’s impact.
While this could be a sign of strength from the government getting behind its people, it may hint at problems that aren’t being addressed right now. These “problems” left unchecked could be just the reason for interest in gold & gold stocks to grow.
Let’s explain. The fundamentals supporting a bullish market for gold continue to strengthen. Central banks continue to print new money to “help the global economy”.This is great in theory. But it adds liquidity to the banking system and dilutes the markets for the time being.
More Spending By Governments
Trillions of dollars are flying into the market across the globe by central banks right now. Further, as much as it could help the people, a stimulus will also require the government to spend even more cash as a short-term bandaid.
“We are looking at sending checks to Americans immediately. What we heard from hardworking Americans, many companies are now shut down whether bars or restaurants, Americans need cash now and the president wants to get them cash now. I mean now in the next two weeks. We want to make sure Americans get money in their pockets quickly,” he said, adding that more details would be revealed later today,” Mncuhin said.
This follows moves by the Federal Reserve, which slashed rates to 0%. This was the second “emergency rate cut” within less than a few weeks after the previous cut to 1%. In addition to rate cuts, there is a plan to buy another $700 billion worth of Treasury bonds and mortgage-backed securities, by the Fed.
There’s also been a deal made with 5 other central banks. These include the Bank of Canada, the Bank of Japan, the Swiss National Bank, the Bank of England, and the European Central Bank. It’s being done to lower the rates on currency swaps in an effort to keep the financial markets at the status quo.
Energy Sector Helping Gold Miners
On top of this, we’ve got a unique situation where the energy sector is “cheap”. Things like oil and natural gas are getting hit by new supply recently. Since one of the biggest costs of operating a gold mine is power, this could bode well for gold miners. In turn, it could translate well for gold stocks. Thanks to this unique scenario where gold prices are near 7-year highs and oil prices are near4-year lows, the dynamic supports the idea that margins could be stronger in 2020.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected.”Federal Reserve
For now, there’s still a price war between Russia and Saudi Arabia. Global demand has also posed an issue for oil prices. Because of the coronavirus effectively shutting down major industries, high supply, and low demand is a bad economic pair.
Therefore, if gold miners are looking at the longer term, they’ll look to lock in these lower oil prices. How? It’s possible for them to look to the futures market to take advantage of current pricing. In this case, they would be able to secure larger margins as gold prices currently trade above $1,500/ounce.
Time To Buy Gold Stocks?
This begs the question: Is it time to buy gold stocks? If you look at the last few trading days, it’s obvious that gold stocks are in rally mode. How long that rally will remain is up for debate. The last dip for gold prices came as traders sought out safe-haven investments to cover shortfalls in traditional stocks. Meanwhile, the market, in general, is on shaky ground. We’ve got the latest from the Big 3 auto manufactures suggesting that plants could shut down. Whether or not that would cause another downturn for gold prices is yet to be seen.
However, as far as the bigger picture economics are concerned, the global financial situation could argue in favor of a bullish gold market right now. The government is funneling money into a stimulus package, the Federal Reserve is indicating to other central banks that quantitative easing is becoming more and more a necessity, meanwhile, some of the top banks are using the discount window to access cash. This in itself is something we haven’t seen since the financial crisis.
This window is meant to provide emergency liquidity to banks during times of a cash crunch. Assuming the economy is as strong as we are made to believe, why would any bank need to use this even if it’s being offered. Banks haven’t utilized this window since the 2008 crisis.
But, led by Morgan Stanley, banks have begun borrowing from the Fed’s so-called discount window. So given the basic financial state regardless of the immediate concerns over COVID-19, is now the time to start buying gold stocks once again? If you take a look at the last 2 days, some of the top gold stocks have begun to rally in a major way:
|Newmont Mining (NEM)||35%|
|Barrick Gold (GOLD)||40.7%|
|Franco Nevada (FNV)||46%|
|Kinross Gold (KGC)||66.5%|
|Alamos Gold (AGI)||71.5%|
*All % Changes Are Based On March 16th Opening Price To March 17th High
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