Major Lag in Gold

Catch-Up Rally Will Be Epic!

Many of my readers are in celebration mode now that the gold price has broken above the crucial $2,000 resistance level. This could easily be the start of a much bigger rally since other commodities have had their breakout moments and it’s finally gold’s turn to shine.

Month after month, the financial markets have conveniently ignored the war in Ukraine that’s been going on for over a year and a half. Yet, the market paid attention when conflict erupted in the Middle East and America’s oil supply was suddenly threatened by Iran’s involvement.

The next thing you know, gold is above $2,000 and the media is talking about it as a safe haven. I’ve been pounding the table about owning gold for a long time because you’re supposed to diversify your portfolio before a crisis happens, not afterwards.

The window to buy gold is still wide open since there are multiple crisis situations unfolding abroad as well as in the U.S. The red flags are numerous from the nation’s unsustainable sovereign debt load to sky-high borrowing costs and the crisis in both the U.S. housing market and commercial real estate.

Gold is still far below its true value. Even at $2,000, it hasn’t really started on its supercycle. At the same time, gold has already rallied sharply against a number of currencies other than the U.S. dollar. As the dollar moves higher against some other global currencies, it gives the appearance of being “strong,” and that’s how mainstream media pundits will spin it.

The U.S. dollar is only “strong” if you compare it to currencies that are losing value at an alarming rate. The chart below provides a textbook example of this. If the Japanese yen is falling sharply against the dollar, that says more about Japan’s economy than it says about America’s fiat currency.

Since gold has visited $2,000 several times during the past year, investors are looking for follow-through in the coming weeks. Unless the dollar continues going vertical forever, gold should easily move higher and $2,000 will become a support level instead of resistance.

Along with physical gold, investors can own shares of carefully selected mining stocks to get some leverage on gold’s move higher. What’s great about gold mining stocks is that they can fit into just about any U.S. brokerage account, even including many retirement accounts.

Even as gold is on the cusp of a major breakout, gold mining stocks still need to play catch-up. It’s baffling to investors who’ve watched their physical gold holdings gain value recently while their mining shares lagged behind.

The main reason for this odd phenomenon is that gold miners are businesses, and they’ve been suffering from the same central bank policy errors that have besieged practically all U.S. businesses. The Federal Reserve is hellbent on cutting down inflation, and it’s been putting tremendous pressure on businesses by jacking up the cost of borrowing money.

It’s bizarre to witness dislocations in the market like Newmont (NEM) stock trading below its level during the COVID-19 drop. No one actually thinks that Newmont, a mining giant, is worse off now than it was during the COVID chaos with its mine shutdowns.

But here we are, and gold mining stocks are trading at depressed valuations. If you truly believe in the “buy while there’s blood in the streets” concept, this is what blood looks like, and it’s not pretty.

Of course, the Fed won’t keep borrowing costs high forever. The nation can’t afford to pay massively high interest rates on the federal debt. It’s just a question of when, not if the Fed will chicken out and pivot back to easy money policy.

It’s difficult to predict the exact moment when that pivot will happen. Suffice it to say that there’s political pressure on the Federal Reserve to start cutting interest rates with an election year coming up in 2024.

The time to make your move is now, not after bond yields crash and gold surges to new all-time highs. Right now, gold miners – not just Newmont but also the junior gold producers that could be next year’s hyper-growth superstars – are having their capitulation moment. Some of these stocks are below their COVID lows, which is ridiculous when you think about it.

This is the gap that you won’t hear about from the financial press. The unusually wide divergence between the prices of physical gold and mining stocks can’t last much longer. When this gap closes, gold mining shares will spike higher so quickly that most short-term traders will miss the move.

That’s one reason to be a long-term investor instead of a short-term speculator. When gaps like this resolve themselves, the price rallies tend to be violent. People then wait for a pullback that never comes and end up blaming the market for the missed opportunity.

Instead of playing the blame game later on, you can start adding to your position today. The market will fill the gap between gold and mining stocks when it’s ready, not when you and I want it to happen. Then, when gold is far above $2,000 per ounce, those who got into mining stocks when they were down will get a well-deserved boost to their bottom line.