Gold Poised for a Great Fourth Quarter

Sean Brodrick By Sean Brodrick,

Metals

Gold clocked a 2% rise last week, its biggest weekly gain in two months.

For that, investors should send thank-you notes to Janet Yellen and the Federal Reserve board of governors. For the second time this year, Federal Reserve officials pointed to a looming rate hike and then pulled back. Never mind all the times that Fed governors tried to sell the idea of multiple rate hikes this year.

Anyway, Yellen & Co. did NOT raise interest rates at last week’s meeting, and currently they’re hinting at only one hike in December. But now what? What will happen going forward?

We’re looking at a great fourth quarter for the shiny stuff. Even better, it might come with a buying opportunity. And you can make money in both precious metals and select miners.

Here are some factors that could push gold to new heights this year.

First, the Fed will try to pull back the market’s expectation of only one rate hike at most. Does that seem crazy, considering its easy-money, loosey-goosey stance from last week? Ha! The Fed governors talk in such contradictory circles that the Riddler should be taking notes.

So I expect the Fed to start selling the idea of two and possibly three rate hikes by the second quarter of next year.

That doesn’t mean it’ll do it.

The economy is much weaker than the Fed likes to pretend, with constant disappointment in manufacturing and services numbers. The reason employment numbers are improving is people have stopped looking for work. Barring some improvement, the Fed’s hands are tied.

So, no, the Fed will not raise rates. But it wants you to think it will. That could cause gold to pull back briefly. That will be the buying opportunity I talked about.

Wall Street Ready to Panic

Now let’s add another factor that will drive gold in the next quarter: Wall Street. It is only just starting to price in a Trump victory. Citibank is one of the first to have raised the alarm. In a note, the bank said…

Citi’s base case is for a Clinton victory and mostly continuity in policies, which would leave U.S. and global growth expectations relatively unchanged… But a Trump victory is a wild card and Citi expects this, among lingering uncertainties from Brexit and elsewhere, may cap the prospects for global growth to pick up in the remainder of the year.

Yeah, Citi is scared of Trump. Well, I have news for Citi… Time to put on the Depends.

In February, on a MoneyShow cruise, I said Trump would win. I was the only speaker who thought so. Since then, my opinion has only strengthened. That doesn’t mean I think he’ll make a good president (I don’t).

Nonetheless, due to many factors – including that Hillary is a bad candidate – I expect Trump to win.

So just wait until the white-shoe crowd on Wall Street really starts to panic. Now what do panicked people do? If the past is any guide, they A) move into cash, B) buy Treasurys and C) buy gold.

And that gold run could go all the way to November 7 and beyond. Trump with nuclear codes. Think about it! I’m sure Wall Street will. It will be gold’s Brexit boost all over again, only more so.

Supply and Demand

The first two things I talked about – the Fed and the presidential election – are political and psychological factors.

Now let’s get physical.

Investor demand for gold is soaring. In fact, it was the biggest factor in gold demand for two quarters in a row (the first half of this year). That’s the first time this has ever happened.

In fact, despite the pullback in gold prices leading up to the Fed meeting, holdings in gold-backed ETFs stayed near three-year highs.

etf-gold-steady

That horizontal price action is what I call an “energy field.” Gold is building up energy for its next big move, up or down.

Up? You bet. Even if the political and psychological forces melted away tomorrow, we would still have Peak Gold.

Peak Gold

Now, if you’ve seen me talk about precious metals at conferences, you know that I harp on and on about how gold discoveries have peaked and gold production probably peaked last year. In other words, Peak Gold. This is an environment of rising demand.

It doesn’t take a genius to figure this out: Less supply + more demand = higher prices.

But it’s not just me saying this. Goldcorp is banging the table about “significant supply constraints ahead” for future gold production. Goldcorp’s estimate is that it takes 20 years to move from a prospective piece of dirt to a producing gold mine. And a nearly five-year brutal bear market killed gold exploration.

Hence, gold production peaked last year.

peak-production

What’s more, Goldcorp says that production by the big gold miners will actually fall by 8% between 2015 and 2018. In a market of rising demand. Wow!

Sure, there are some wild cards in all this. Consumer demand in China and India are two of the biggies. Will they buy? Won’t they buy? I don’t know. I know what I want to do. And I think I know what Wall Street wants to do. And that’s get long precious metals and select miners.

At the recent Denver Gold Forum, a gathering of mining executives, funds and analysts, a survey of participants put a price target of $1,385.63 on gold by the end of the year. That’s about 3% higher than recent prices. Not a big move. I think that’s a lowball number made by guys still feeling the bruises of a five-year bear market.

But that doesn’t matter either. As I have also explained in my presentations, that move is magnified in the cash flow of profitable miners.

We are facing trying times, politically and financially. Many of your choices may be unappealing. But for me, gold is a choice that shines.

Good investing,

Sean

P.S. If you’re interested in gold, you should join me and some of the smartest investors I know at the New Orleans Investment Conference. It’s just weeks away.

Investing isn’t getting any easier in this crazy world, and you need an edge. So check out the New Orleans Investment Conference, October 26-29. You can find all the details here.