Watch for Dollar and Gold Strength, Despite Stimulus
BY: GERARDO DEL REAL
For years I’ve explained that the dollar is the cleanest dirty shirt in the currency laundry basket and that for gold to sustain new all-time highs it would need to do so alongside a rising dollar.
I believe the recent pullback in the gold price — and the related juniors — is the first real test of that thesis.
The dollar has been weak for months with only hints of strength. But given the resurgence of lockdowns — whether you believe Covid-19 is real or not the lockdowns most definitely are — countries around the world are now faced with the task of maintaining their economies afloat while keeping businesses shut down.
Again, whether we agree with the policy or not is irrelevant, it’s what comes next that’s important and consequential to those of us that speculate in the tiny corner of the financial world that is the gold and junior resource markets.
What comes next is stimulus. A lot of it.
But all stimulus is not created equal.
Enter the ECB, which announced this morning that it’s likely to counter new nationwide lockdowns in Germany and France — the two largest economies in the region — with more monetary stimulus.
As recently as September, the ECB estimated a contraction of 8% in Eurozone GDP this year. That was before the new lockdowns.
Now the ECB says it will “recalibrate its instruments, as appropriate, to respond to the unfolding situation.”
The market responded with gold nearly flat, after briefly hitting the $1,859 level before rebounding back to $1,873/oz.
It did so alongside a rising dollar which was up half a percent.
The market is anticipating Europe’s next move and the only question is whether or not the market tries to force the ECB’s hand by throwing a tantrum that expedites the planned policy action in December.
Here in the U.S. the election is days away. We’ll have a better indication of whether the next stimulus package will be $2 trillion or $3 trillion.
The most recent pullback in the juniors has been unsettling to many of you, given gold’s relatively steady performance and a rising copper price.
It’s a classic one step back before the next two steps forward that happens in every bull market.
The new capital that rushed into the junior resource used the pullback in the space to take gains off the table.
I believe that correction is near its end and provides an excellent entry point for newer capital in the space.
It also provides an excellent opportunity to add to the quality names with near-term catalysts independent of a rising gold price, which is exactly how I’ve played this pullback.
I’ve written checks to help finance companies in the past month and have added to already robust positions in my favorite names.
Use this opportunity to do the same. This gold bull is just getting started and I believe we are on the verge of the next leg up.
One that sees the major U.S. indices, bitcoin, the dollar and gold all holding hands together on the way to higher prices.
Like the lockdowns, you don’t have to agree about the righteousness of why asset prices will continue higher. We can’t do much about that but we can make some money off of it.
As you know, all of my and Nick’s premium publications are now up and running.
You can check them all out here.
Stay safe out there.
Let's get it!
Gerardo Del Real
Editor, Resource Stock Digest
For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Resource Stock Digest, Junior Resource Monthly, and Junior Resource Trader. For more about Gerardo, check out his editor page.
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