If the Fed backtracks from rate hikes, gold miners can go up 50%.
- CNBC, February 4th, 2016
We have been predicting for months that the Fed would not be able to raise rates as aggressively as the market was expecting. Thus, we have been long gold and mining stocks, believing that a reset in expectations for how fast the Fed would raise rates would be bearish for the USD and bullish for gold.
While we've already seen a huge move in precious metals thus far in 2016, I believe the gains are just getting started. The technical charts are very bullish for precious metals and mining stocks, as they have been consistently making higher lows and higher highs over the past few months. The gold price has also blasted upwards through resistance at both the 100-day and 200-day moving averages - a bullish sign.
While the overall chart is very bullish, the RSI momentum indicator suggests that the current move higher may have recently become overheated. So, we could see a pullback towards the 2016 uptrend line at some point in the coming weeks. But I expect the uptrend in gold to continue unabated throughout the remainder of 2016 and into 2017.
Despite this impressive move in the gold price, mining stocks are still vastly undervalued, especially relative to the price of the underlying metals. The HUI-to-Gold ratio shows the relationship of mining stocks to gold over time. While there has been a small bounce off lows below 0.10, mining stocks remain near their most undervalued levels in history. In fact, the index shows that mining stocks are more undervalued now than at the beginning of the gold bull market in late 2000 or the depths of the 2008 financial crisis.
This suggests that there is huge upside ahead in mining stocks, even absent a huge move in the gold price. However, if the gold price climbs above $1,500 or returns to previous highs, I expect to see astronomical returns from mining stocks. While many stocks will see leverage of 3x-5x the underlying move of the metal, I believe the best-in-breed mining stocks that we hold in the Gold Stock Bull model portfolio could see leverage in the range of 10x-20x the gain in the gold or silver price.
The move higher in precious metals during 2016 suggests that we have most likely seen the bottom of the current correction. The total U.S. debt has recently made a new record after topping $19 trillion, and physical demand for precious metals has been very robust in the past year. Therefore, I expect the gold price to continue higher in 2016 and mining stocks to generate significant gains for investors that are brave enough to buy while sentiment still remains largely bearish.
The risk for gold bulls is that the equity markets bounce strongly, inflation ticks up and the Fed returns to an aggressive stance regarding the pace of interest rate tightening. This would likely re-ignite the USD rally, finally push the index above resistance at 100 and lead to funds flowing out of safe-haven assets like gold and back into equities. However, I see the odds of this scenario playing out in 2016 as extremely low. The USD index has likely topped out, after failing once again to break above resistance at the 100 level.
Furthermore, gold has a history of rising along with interest rates, in a complicated relationship that few investors fully comprehend. The metal has dropped largely on the expectations of the Fed raising rates. Now that they have started and expectations of additional rate increases are falling sharply, the sky is the limit for the gold price going forward, and I expect huge amounts of wealth to be generated by those positioned in the best-in-breed mining stocks.
I especially favor gold and silver companies that high grades, low costs, significant growth in the pipeline and seasoned management. Those that have been acquiring new projects over the past few years at deeply suppressed prices will be rewarded for running against the herd, and the value of their investments will skyrocket. Those are the companies that we focus on acquiring in the Gold Stock Bull model portfolio, and we are confident that they will outperform by a wide margin as the gold bull market awakes from its slumber and charges higher once again.