The Underdog Story of 2017

Sean Brodrick By Sean Brodrick,

Metals

Have you ever been in a fight? Maybe it starts well and you land some solid punches. But then things go wrong.

A sharp jab beneath your ribs knocks the wind out of you… a haymaker lands hard enough to send you sprawling…

Gold investors find themselves in a similar fight right now. They’re facing an opponent called rising interest rates. Investors had interest rates on the ropes for the first half of 2016. But that tough character picked itself up, dusted itself off and came back swinging. And now investors are taking a beating.

Here are the painful facts. In July 2016, the 10-year yield fell to 1.36%. Since then, that yield climbed to a recent high of 2.62%.

A move of more than 100 basis points is huge. HUGE! Unexpectedly huge. And it has hammered gold like a champion prizefighter.

Why? Back in May, I explained how crashing bond yields made gold more attractive. Since gold doesn’t pay interest, the lower bond yields are, the less the “carrying cost” of owning gold.

So the opposite is true. As Treasurys go up, gold looks less attractive. It takes a pounding.

And it’s been taking it on the chin since October.

And the U.S. Federal Reserve recently announced it anticipates three interest rate hikes of 0.25% each in 2017. It said inflation was near its target of 2% and the labor market was strong.

It’s another punch to the gut for gold.

So to get back to my original question… Are you going to keep fighting or run for the door?

Let me tell you this: Don’t count gold out yet. Interest rates could get sucker punched.

For one thing, we probably won’t see three rate hikes this year. America’s economic recovery is still weak. Rising interest rates boost the U.S. dollar. The greenback has risen 7.5% since rates bottomed. And a stronger dollar hurts exports.

Now add in the potential for Trump getting into a trade war with Mexico or China. If he follows up his tough talk with action, we could see fireworks that hurt economic growth. That’s also a blow to the idea of raising interest rates.

It’s unpopular to point these things out. Especially when sentiment is as bullish for Treasury yields, interest rates and the U.S. dollar as I can remember.

Meanwhile, sentiment for gold is at rock bottom. Investors are throwing in the towel.

Do you remember the last time investors threw in the towel for gold? Back in December 2015. Right before gold went on a 30% rally!

Gold miners performed even better…

While gold rallied 30%, gold miners, as tracked by the VanEck Vectors Gold Miners ETF (NYSE: GDX), soared 136%!

What could trigger such a rise this year? Along with the fact that sentiment is stacked too far to one side, the yellow metal is a champion in its own right.

For example, the third quarter saw global gold production fall by 0.5%. This was the second quarter in a row it was down year over year. This is the “peak gold” that I’ve been warning you about.

Gary Goldberg, president and CEO of Newmont Mining (NYSE: NEM), told reporters that he expects to see global gold supply drop about 7% by 2021.

There is also the fact that metals are cyclical. And a big multiyear downtrend ended last year. Gold’s path may have some big zigs and zags, but the easiest path for the metal is higher.

Now let’s add in that gold is a go-to safe harbor in a troubled world – the kind of troubles that flattened U.S. Treasury yields and drove global bond yields below zero in 2016. Those troubles haven’t gone away.

Take your pick – there’s terrorism, financial instability, “too big to fail” banks skating on thin ice and more. Those problems, if anything, are getting worse.

It’s just the right environment for gold to pick itself up, come charging back and swing with an uppercut as interest rates go down hard.

So I say gold isn’t down for the count. And the best victories are hard-fought. Stay tuned. The bell is ringing to start the next round.

Good investing,

Sean