Inflation is something that happens to balloons. In this context it is an increase in the combined quantity of money, currency, and credit, which will tend to increase prices all else being equal. – Alasdair Macleod, Inflation Defined
NOTE: The commentary below is from my latest issue of the Mining Stock Journal. I present several micro-cap junior ideas that I believe have home run potential as well as a discussion of how I’m playing the Gold Fields (GFI) takeover of Yamana Gold (AUY).
With all of the factors in place to support a big move higher in the precious metals sector (raging inflation, escalating geopolitical tensions, recessionary economy, etc.), the recent market action is frustrating to say the least.
To be sure, a certain percentage of the poor performance in gold, silver and mining stocks is attributable to the ongoing decline in the general stock market. It’s a bear market.
As I’ve discussed previously, when capital pulls out of the markets (stocks and bonds), it pulls out of everything. March 2008 to late October 2008 is a good parallel to the current market.
At some point there will be a catalyst, or catalysts, which triggers a positive divergence of the precious sector from the rest of the stock market. Again, look at a chart of GDX from November 2008 to March 2009.
The most likely event will be the reversal by the Fed of its monetary policy. But that may not be necessary if price inflation continues to escalate—this would trigger a rush into physical gold and silver, something that seems to have started already at the retail level in the form of a big jump in sales at the U.S. Mint.
That said, gold continues to move in a steady uptrend that extends back to March 2021:
There have been several successful tests of that uptrend/support line along the way. Currently, gold seems to be holding its 200 dma. While anything can happen over the short term (next couple of months), I expect a big move in the sector sometime between now and Halloween.
Also, keep in mind that the effort to prevent gold and silver from moving higher has been particularly aggressive since gold was turned back from $1975 in mid-April.
But 85-90% of the time, gold has been rising during the hours when the eastern hemisphere physical accumulators are trading and gets pushed lower once London and then NY open, which is primarily paper derivative gold trading.
When gold shakes off the latest price control effort, it will shoot over $2000 and move higher from there. Similarly, silver is in a dog fight at $22. But once poor man’s gold prevails, it'll move higher toward $30 quickly.
I make the case for why the Fed likely will be forced to reverse its monetary policy eventually in this podcast produced for Arcadia Economics: