Top gold miner blow-out Q1 has shorts running for cover
Fri April 26 2024
With the gold price becoming extreme overbought following a $450 move to the upside from its major bottom at $2000 in mid-February, a healthy correction of outsized gains continued this week.
After fighting in the Middle East calmed down last weekend, nervous longs began to take some large short-term profits off the table on Monday. The effects of “higher-for-longer” interest rates on the U.S. economy came back into focus ahead of the next FOMC meeting conclusion on May 1.
Once Gold Futures moved quickly back down to test support at $2300 by Tuesday morning, willing buyers came in to take the gold price back up to recent support at $2340 ahead of key U.S. economic data.
In the initial estimate released on Thursday by the U.S. Bureau of Economic Analysis (BEA), it was revealed that U.S. GDP expanded by 1.6% on an annualized basis in the January-March period. This expansion, coming in well short of 2.5% market predictions, followed a 3.4% growth in Q4 2023.
The annualized GDP chain price, which measures how much prices have gone up or down in the economy that helps track inflation, jumped from 1.6% up dramatically to 3.1%.
Gold quickly moved up another $25, while the Dow promptly plunged over 600 points at the opening. Stock markets have been mostly down since the beginning of Q2, led by the S&P 500 that has fallen just over 5%, while the gold price has risen over 12% after a major breakout.
Key A.I. related stocks like Nvidia, the leader of the Magnificent Seven, are now down over 20% from their high. The definition of a bear market. The continued rise of A.I. stocks into bubble valuations has been a major reason for the lack of retail investment coming back into the gold space.
The GDP report reflected the worst of both worlds, insofar as growth is slowing, while the U.S. Department of Commerce said this morning that its core Personal Consumption Expenditures (PCE) price index increased 0.3% last month as inflationary pressures persist.
Both the U.S. GDP and PCE reports released ahead of next week Wednesday’s FOMC meeting reflect what the gold price has already sniffed out. The world’s largest economy is heading into stagflation, as the government raising taxes has reduced GDP, while inflation remains well above the Federal Reserve’s mandated target of 2%.
At the Economic Club of New York on Tuesday, JPMorgan Chase CEO Jamie Dimon warned investors about a period of stagflation. “Stagflation has the negative effect of no growth and inflation. That hurts profits and consumers and jobs. And yes, I think there is a chance that could happen again,” he said. “I worry that it looks more like the 1970s than we’ve seen before.”
With the Federal Reserve being silenced by the blackout period ahead of its May 1 monetary policy decision next week, Treasury Secretary Janet Yellen attempted to stem the strong negative market reaction to the U.S. economy growing at its slowest pace in nearly two years last quarter.
"The U.S. economy continues to perform very, very well," Yellen said in an interview with Reuters on Thursday when she cited "peculiar but not concerning" reasons for the much lower-then-expected U.S. GDP data. Yellen added that she also expects housing inflation to ebb as the year progresses.
Although Yellen’s remarks somewhat stemmed the selling in general equities, gold stocks continue to outperform both the stock market and the gold price as Q1 earnings season kicked off with a bang also on Thursday.
Top gold miner Newmont Corp. (NEM) topped Thursday's S&P 500 leaderboard, rising 12.5% with strong volume to a nine-month high, after easily beating estimates for Q1 adjusted earnings and revenues.
Q1 attributable gold production rose to 1.7M oz from 1.3M oz in the year-earlier quarter, while spot prices of gold increased 8.2%, helping the company realize higher prices at $2090/oz compared to $1906/oz in the year-earlier quarter.
Coming into Q1 earnings season, mainstream investors had been largely ignoring gold stocks despite the breakout in gold prices since mid-February. Over the past few months, gold has moved swiftly from a year-to-date low of $1996 per ounce on February 13 to $2230 at the end of Q1 to $2450 on April 12.
Yet, Newmont’s share price trading 50% below its 2022 high at $80 has been a bellwether for mining sector underperformance in relation to the gold price ahead of the world’s largest gold miner’s Q1 results released this week.
The long-awaited gold stock return to the mean received a major boost after Thursday’s Newmont Q1 announcement. Yesterday’s sharp move higher in NEM with strong volume shows short sellers are getting the message that a sharply rising gold price has begun to cure the margin compression gold miners have been dealing with over the past four years.
Even if the gold price continues to consolidate its recent 2-month $450 gain above $2250 into Q3, gold stocks in general still have plenty of catching up to do. On the back of Newmont’s blow-out Q1, the profit margins of gold miners are set to expand dramatically, assuming sustained gold prices at or above strong support at $2200 per ounce.
Newmont reported Q1 all-in sustaining costs (AISC) of $1439/oz, a 5% increase from the year-ago period. But the higher costs were more than offset by the recent gold price strength, and this is even though gold did not begin its huge move until late in the first quarter.
Yet, even with an average realized gold price of $2090/oz in Q1, Newmont reported AISC margins of $651/oz (Q1 2023: $530/oz) or a 23% increase year-over-year.
After four years of margin compression eating into miner profits, this capital-intensive industry has made significant advances in productivity that will drive margin expansion during this new gold bull market. BMO Research forecasts a decline AISC of 14%, 11% and 25% for large-, mid- and small-cap producers, respectively.
As the markets reaction to bellwether gold miner Newmont’s Q1 results showed, the bullish gold momentum is set to translate into precious metals stocks. Now that fear has crept into the stock market, investors are in the early stages of rotating outsized A.I and crypto profits into the relatively tiny mining complex.
Previously in this space, I have mentioned that gold and gold miners were a very small percentage of total global assets, with the entire market cap of the gold mining sector being less than that of Home Depot (HD).
Here is a chart from Crescat Capital that appears to support this thesis, which shows gold and gold miners being at their lowest point in the past century as a share of global assets. Under 1% of all global AUM is allocated to gold versus 8% at the peak in 1980.
This also supports the fact that over the past 12-years, since the top in the gold miner complex in 2011 has, for the most part, been in a depression.
We are now seeing signs that this could be changing, which hints that the long-forgotten and left-for-dead gold mining sector is close to embarking on an historical bull market like we saw from 2001 to 2011.
With the mining sector being this small, it would not take much of a shift from the broader market into gold to move this relatively tiny sector higher very quickly, as it has done so in the past after a major breakout in gold.
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Source: https://www.kitco.com/