Now Entering Gold’s 4th Dimension

From the desk of Katusa Research

Nearly 15 years ago we began an incredible global fiscal experiment.

Banks got a little too adventurous with risky debts and had assets that were pretty much a mystery in value. This mix almost crashed the entire banking system.

It was wild – big names in banking, ones we thought were untouchable, crumbled within months. Remember these?

• Lehman Brothers

• Merrill Lynch

• AIG

• Washington Mutual

• Fannie Mae and Freddie Mac

• Royal Bank of Scotland

• Bradford & Bingley

• Alliance & Leicester

These were the giants of finance, and they either went bankrupt or were scrambling for a bailout. These bailouts paved the way for what would become the largest fiscal and economic experiment in generations.

Governments stepped in with what turned into the biggest money experiment we’ve seen. It’s called quantitative easing.

Basically, central banks slashed interest rates to almost nothing and increased the money supply into the economy, all to kickstart growth.

 In the span of 10 short years, the Federal Reserve and the European Central Bank had nearly doubled the supply of money in circulation.

Coming out of the depths of the financial crisis, you would have expected that the combination of exorbitant money supply growth in combination with ultra-low rates would pave the way for gold to scream higher.

And for a short period, this was the case.

Gold rose spectacularly from $850 an ounce in early 2009 up to $1900 by mid-2011.

In fact, relative to major indices, gold and gold stocks were the number one performers around the world.

A key driver in explaining the performance of gold was not the demise of the U.S. dollar like many incorrectly called for.

But in fact, the “real rate of return” became an integral explanatory variable for gold price movement.

Gold Enters the 4th Dimension

Real yields are bond yields adjusted for inflation.

For 15 years there has been a correlation between the gold price and the real yield. As you can see in the chart below there are 3 distinct bubbles.

In red, is the 2005-2007 pre-GFC area. This interestingly showed that higher real rates tended to be paired with higher gold prices.

In yellow, from 2008 through to early this year, there was a strong correlation between low or negative real rates of return and high gold prices.

If the past 15 years are any indication, gold prices are massively overbought using this real rate analysis. However, at least in the short term the tide seems to have shifted.

Recently, gold albeit briefly, ripped to new all time highs.

Yet, the typical drivers of gold price action were muted. The U.S. dollar is essentially unchanged relative to other major currency pairs, interest rates have soared, and inflation has cooled off.

Theory says that this should be a bearish environment for gold, but recent price action says otherwise as gold is up close to $200 per ounce for the year.

Bearish or Bullish Setup for Gold ?

We have approached the top end of the recent range for now a 4th time.

And each of the past three attempts to breakout concretely through $2,500 has been met with ferocious resistance.

Is this the head fake that shoots us to $2,500 per ounce and forces consolidation above this level?

Perhaps. It’s not guaranteed. But there are more and more signs forming that this looks like it could happen. Either way though, there’s a bigger story going on.

Gold Stock Party Invites Got Lost in the Mail

Interestingly, while gold has ripped higher, gold miners have not participated at all this year.

Gold is up roughly 10% for the year, yet miners are actually negative, down 1% which gives us the chance to buy gold stocks at multi year lows.

The Achilles heel of the gold miners continues to be construction and operational cost control.

Below is a chart which shows the steep rise in costs over the past decade.

One of my go-to phrases is “fortune favors the bold” but I do believe this is a time where being bold is to be very careful.

Loading up on the expectation of continuation of soaring gold prices seems overly aggressive. Rather, I am looking at several world-class businesses that have been crushed.

These are companies that have generational assets and world-class management teams.

My readers just found out about my latest idea a few days ago and know exactly how I am going to play it.

In short: while I do believe 2024 is going to be a challenging yet fruitful year… one that will provide significant opportunities, it will include many death traps as well.

Prepared investors can do well but I do NOT believe a rising tide will lift all boats. In fact, most projects will be scuttled, along with the investors who blindly threw their money into doomed ventures.

That’s why it’s critical you own only the correct mining projects – like the ones I’m focused on here.

Regards,
Marin Katusa