Gold Is Crashing… Time To Buy a Little?
Weekly unemployment data was released this morning that — although still kind of awful — managed to beat expectations. Initial claims fell to 779k (vs 830k expected), and continuing claims dropped to 4.6 million, which is the lowest point since before the COVID-19 outbreak.
Source: Bloomberg
And while the total number of persons collecting some form of unemployment insurance did fall by nearly half a million people, 17.8 million folks out of work is still… Well, it’s bad.
Source: US Department of Labor
Nevertheless, the resulting optimism sent both the US Dollar and interest rates higher in the morning.
And since gold prices have been negatively correlated with both instruments of late, we’re now seeing some capitulation there, with prices well down below $1,800 per troy ounce.
Source: Bloomberg
The line in the sand that we need to pay attention to is the Nov. 30 low at $1,762.30 per oz.
Should that level break, that would mark a new low, meaning the yellow metal’s six-month bearish trend will remain intact.
Source: Bloomberg
That means that if you’ve been wanting to pick up shares of any gold stocks on our Christmas List, today is not a bad day at all to do so.
Those 5 – Newmont Corp. (NYSE: NEM), Barrick Gold Corp. (NYSE: GOLD), Agnico Eagle Mines Ltd (NYSE: AEM), Kirkland Lake Gold Ltd (NYSE: KL) and B2Gold Corp. (NYSE: BTG) — have all been beaten down into ranges where they look fairly attractive.
One caveat though — I’m not buying at scale.
All of these companies report over the next two weeks. And although earnings expectations are more modest than in Q3 — not to mention they are all literally printing money as they progress through operational plans — there is still some risk for gold prices if the broader stock market remains red hot.
The first one to report is Agnico Eagle next Thursday.
Last quarter’s earnings report posted 78 cents per share (versus a consensus estimate of $0.67) on the back of a record realized gold price of $1,911 per ounce.
Average gold prices declined by 2% in Q4, and while that’s going to pare back performance a little, the consensus estimate is actually a little lower than last time.
Source: Bloomberg
My estimate (74 cents per share) has them beating that expectation handily, but again, I suspect share performance will have more to do with gold price performance than with fundamentals this time around.
Picking up a speculative 0.25 tranche in ProShares Ultra Gold (NYSEArca: UGL) does make some sense here, as it’s back down near last year’s support levels.
The idea on this speculation would be to sell any gold-price rip back above $1,800, while using a tight trailing stop around the 5% level in case the bottom falls out.
Then, I’ll watch Agnico Eagle’s earnings next week for clues as to how the others on our list will perform.
Keep in mind, as bad as economic data actually was today, the fact that it exceeded expectations is what’s pushing the dollar and interest rates higher.
And those year-on-year comparisons only get easier from here through the summer.
That’s because this time around, we’ll be comparing a growing economy this year to one that was essentially on lockdown in 2020. And that creates huge distortions in the data.
Economists call these distortions “base effects”. And while the distortions will look positive through June, the rate of change of US GDP growth will almost certainly slow over the back half of the year.
Especially so if unemployment proves to be sticky.
When that happens, the talking heads on TV won’t be talking about GameStop.
Instead, they’ll be begging to stop the game.
That… is when you need to own gold.
All the best,
Matt Warder
