by Gwen Preston
From The Maven Letter
Gold staked out a new trading level above $2000 per oz. It did so quickly and has held steady since.
The impetus yesterday was the JOLTS report. JOLTS stands for Job Openings and Labor Turnover Survey. It’s a slow-to-compute number so yesterday’s report gave the result for February, which was 9.93 million job openings. That was 470,000 below expectation and a 620,000 drop compared to January, a big difference.
JOLTS is a number that both Jerome Powell and Janet Yellen watch closely. Powell in particular likes to watch the ratio of job openings to the number of unemployed. The ratio had been hovering around 2.1 jobs per unemployed person until a few months ago; with this new report, it has dropped to 1.6 to 1, a big drop.
Employment is reliably the last strength to give way before a recession. It’s remained strong through rate hikes and last year’s stock market correction, giving reason to believe maybe we’d escape a recession this time. But a weak JOLTS report could be the first indication that employment strength is giving way, which would make recession truly inevitable.
On Friday we’ll get some insight into exactly that question with the March jobs report. The consensus forecast is for 240,000 new jobs. If it comes in well below that, yields will drop again and gold will shoot higher. Since Friday is a holiday, we won’t actually see the reaction until markets open on Monday.
JOLTS wasn’t the only new data point this week. Today we got another suggestion of weakness: ISM Services dropped from 55.1 in February to 51.2 in March. Forecasters expected a drop but it was four times the drop they expected. Prices paid, one of the components of the calculation, cooled more than it had in five years.
Services have kept inflation high – recent inflation reports have shown goods inflation well down but services inflation still strong. As such this Services PMI adds fuel to the Pivot Or At Least Pause camp – if services inflation comes down, overall inflation should drop notably, which would remove the pressure to raise more.
In the space of two days we got a clear suggestion of job market weakness and a sharp drop in services growth – of course short-term rate expectations dropped. A month ago, odds were 33% that the Fed would deliver a 50-basis point hike at the next meeting, with zero chance of a pause. Now those have more than flipped: there’s zero odds of a 50-basis point hike and 52% odds the Fed will pause.
That’s a big change in a short time in the world of yields.
Bottom line: odds of a recession in the very near term keep rising. That’s putting a bid under gold and silver.
Gold Stocks: What’s Rising Now and Whether It Matters
So gold is gaining as a recession hedge. If there is indeed a recession coming, what will happen to gold equities?
There’s no crystal clear answer, for a few reasons.
Usually, gold stocks get sold in a recession or stock market crash alongside everything else. The baby and the bathwater. But we’ve experienced two sharp recessions in the last 15 years and both times gold rocketed out the other side. Those who had positioned ahead in gold stocks did very well, even accounting for share price declines as the storm hit.
Both of those recessions happened quite quickly. This one is unfolding in slow motion. That means investors have lots of time to consider how to position. I think many are remembering the stellar returns that gold and gold stocks doled out in 2009 and 2020 as they make their plans and those memories are encouraging people to position now.
That’s what’s moving gold and major gold stocks. The GDX index of major gold miners is up 28% since March 8th, versus gold’s 11% gain – investors clearly aren’t overly worried that gold miners will slide significantly in the coming downdraft.
What I find interesting right now is that some smaller gold players are also rising with gold. This is not common – when a recession is imminent, investors usually avoid speculative, financing-reliant companies. But some explorers are even seeing out-of-the-blue price spikes, which suggests that at least some gold-interested money that had been sitting on the sidelines, waiting for macro risk to ease before investing in explorers, is suddenly moving in.
Headwater Gold is the standout example from today.
Yes the stock had been working its way higher since last summer, but that doesn’t diminish today’s move from $0.43 to $0.59. And that came after it moved from $0.36 to $0.43 late last week.
If the stock moved because news is pending, Headwater’s CEO didn’t let on. He said he thinks it is simply multiple new buyers coming in.
Callinex is another example. The stock has jumped from $2.80 to $4.55 in the last two weeks. Again, it might be that pending news has slipped out or it might be that sideline buyers decided it was time to get in.
Our latest buys (available for subscribers to the Maven Letter) have also gained nicely over the last two weeks.
To be clear, lots of stocks have not enjoyed lifts like these. But a range of reactions among gold juniors at a moment like this is normal. There’s still a wide range of opinions on whether there will be a recession and, if there is, how to position for it. Among those who do think a recession is nigh, many have no interest in risky juniors, even if they believe in gold from here.
It means many investors have no interest in small gold companies. But enough investors
- are interested and
- want to get in now because they think gold is on the cusp of a major run that top tier juniors are moving.
That begs an obvious question: what makes a stock ‘top tier’?
- Cash in the bank. Financial conditions keep tightening. It could become very hard to raise money over the next while. No money means no progress, so cash in hand matters.
- Clear, well explained plans to test high potential gold targets immediately
- Tight share structure / limited stock available to buy (this is definitely true for HWG and CNX).
I think the fairly select group of juniors that meet those criteria is benefitting already in this gold market. But others are also rising. Another outperformer in the portfolio right now is Guanajuato Silver, which has gone from $0.37 to $0.60 in the last month. It doesn’t fit that list. But it’s a rapidly growing silver producer, which means it offers great leverage to silver. Silver is up 25% in the last month.
Guanajuato may be a producer but it is still a fairly speculative stock in that it’s got debt, is going through major growth, and is still small. So the fact that it’s up 62%, offering 2.5x on silver’s gains, says to me that a good number of silver-interested investors who had been waiting for the right moment to move into leverage plays are now making their moves.
Do I think this is the start of a real gold and silver market? I do.
Am I shifting my portfolio to hold only ‘top tier’ stocks that should benefit first? No.
Those two answers are related.
If I did not think this gold move had legs, it would be important to take advantage of the immediate opportunity. So if I thought gold was making a sharp but short-lived move higher, I might attempt to shift my portfolio to focus on the stocks I thought would benefit most in that short period.
But that’s not what I think is unfolding. I think gold will make a new all-time high in 2023, which granted would only require it to move $70 higher from here, and keep moving higher. I am not one to give specific price forecasts because I don’t see how to forecast a price that depends so much on uncertainty, but I do think the recession, talk of de-dollarization, central bank buying, and a broad metals bull market once we start rising out the recession are all lining up to support a gold bull market that fits in with historic bull runs.
If that’s the case, then it shouldn’t be too long before the gold bull market expands to include all gold players, from pre-discovery explorers to developers and small producers. If the recession sparks a stock market crash, it would drag gold stocks down. But it seems possible that the recession drags markets, rather than crashing them. This has been the most predicted, slowest-to-develop recession ever. The 20% that markets lost last year were a good start on pricing in a recession. There would be more ground to lose in a recession, as earnings usually drop 30% in a recession and that hasn’t been priced in yet, but barring another crisis stocks could just slide like they did in 2022. In that scenario, panic is less of a factor and fewer babies – like gold stocks – get thrown out with the bathwater.
That gold is already showing its hedging power so strongly supports this idea. Gold as a hedge for stocks isn’t a concept right now; it’s a clear reality.
Let me summarize the key thoughts from this too-long editorial as a wrap up.
- Strong employment has been the reason to believe we might not have a recession but a weak February JOLTS number suggested employment strength might be cracking. The March jobs report, due out on Friday, will matter. Expectations are for 240,000 new jobs. If it’s below 200,000 yields will slide and gold will jump; if it’s below 140,000 yields will plummet again and gold will shoot higher.
- A weaker than expected Services ISM number suggests services inflation might finally start falling. If ebbing services inflation finally brings overall inflation down, the rationale for rate hikes disappears. Another pro-gold argument.
- Overall, certainty that a recession Is nigh increased in the last week. Gold shot up past $2000 per oz. in response and stuck.
- For now, not all gold companies are benefitting from gold’s gains. Gold majors are benefitting, as are Top Tier gold juniors. Top Tier means companies with cash on hand to test compelling targets soon as well as companies with significant leverage to gold or silver. The smaller players are gaining despite broad market uncertainty because precious metal investors who had been sitting on the sideline waiting to enter are starting to move in because they see this as the start of a significant move.
- It increasingly looks like this is the start of a real gold bull market. If that’s so, more and more gold companies will soon benefit from gold’s gains. Developers with large, advanced resources that are not going to be stuck in permitting for years will get love soon, as will discoveries being grown into robust maiden resources. Then money will step down the ladder to explorers. Since I think this will play out, I am not re-jigging my portfolio to focus on the opportunity in this moment (only gold majors and a select few gold juniors). Instead, I will hold the many juniors I own and like in the expectation they will enjoy investor attention soon enough.