Valuations, Fundamentals, and Technicals
Since the end of January HAI has presented the essentials of what appear to be potentially high-impact events and developments relevant to the gold market. This week let’s try to look at ways those events and developments could impact the price of gold and related assets.
As initial context for our discussion of gold, it’s important to reiterate that recent strength in the gold price is likely only the beginning. HAI believes that the real substance of this gold cycle is just getting started, and that gold still remains incredibly undervalued at today’s prices.
In fact, HAI agrees wholeheartedly with John Hathaway, Managing Partner at Sprott Asset Management. This week in a Wealthion interview he said that he thinks gold is headed up to $8,000/oz during this cycle.
Additionally, HAI sees no shortage of potentially ripe catalysts that could send gold up to that $8,000/oz level or ultimately higher by the end of this gold bull-cycle. Many of those catalysts have been discussed at length in recent HAI installments.
Also discussed but worth reiterating, Western consensus remains far from recognizing the “grand global economic reordering” the Trump administration may now be about to intentionally accelerate. Similarly, Western investors still appear miles away from recognizing the very likely extreme gold-bullish implications.
We expect that to change, and in fact we expect that to change quite soon. Once a motivated Western investor joins the aggressive Eastern buying and record central bank buying we’ve already seen in the gold market, we think the much higher gold price that results will stun conventional expectations.
Like him or not, agree with him or not, President Trump was elected to his second term with a mandate, and he appears most intent on using it. Importantly, his Trump 2.0 MAGA plan seems like it’s very likely to include a major monetary regime change—one very likely to devalue financial assets and devalue money versus gold and hard assets more broadly. (See The Foothills of Gold’s Eventual Everest for details.)
So, how is HAI interested in playing what looks like a very high probability set-up (interim volatility notwithstanding) for much higher future gold prices?
HAI believes precious metals producers, along with the royalty and streaming companies, represent a generational opportunity in this precious metals bull market. As a group, the precious metals producers and royalty and streamers offer the potential for three-times leverage to the performance of physical gold before this bull cycle ends.
Importantly, that three-times upside leverage is if the companies were merely to return to the very lowest valuation multiples, relative to gold, the sector ever had prior to 2008. And HAI certainly doesn’t think that’s an overly ambitious target at all.
In fact, sector fundamentals argue for just such a move higher. In HAI’s view, at any gold price north of $2,500/oz, this sector is a free-cash-flow machine. Furthermore, that cash flow is now piling-up on very strong balance sheets that have already de-levered and are set to move into a net cash position across the group by the second half of 2025. In addition, management teams have on balance remained very conservative and are demonstrating far more capital discipline than the widespread recklessness that undermined previous bull-cycles. In other words, in HAI’s view, fundamentally, the sector is more deserving of a massive re-rate higher relative to physical gold than perhaps at any other time in the sector’s history.
Furthermore, looking at the sector from a technical perspective, it also appears that the gold and silver producers and the royalty and streaming companies are close to a major upside breakout as a sector. The GDX gold miners ETF has recently been testing upside resistance, looking to break out much higher in the form of a fully mature five-year bullish cup-with-handle pattern.
In short, the current set-up for the precious metals producers and the royalty and streaming companies offers a very rare bullish marriage between valuations, fundamentals, and technicals. All three are now aligned and arguing for much higher prices. If we layer on top our multi-driver extreme bullish outlook for much higher underlying gold prices as well, it becomes abundantly clear that the bullish potential for the precious metals companies, at present, is nothing short of explosive. The sector may well represent a generational investment opportunity.
Weekly performance: The S&P 500 was down 3.10%. Gold was up 2.30%, silver was up 4.17%, platinum gained 3.05%, and palladium was up 4.78%. The HUI gold miners index was up by 4.54%. The IFRA iShares US Infrastructure ETF was down 2.45%. Energy commodities were volatile and lower on the week. WTI crude oil was off 3.90%, while natural gas surged 14.38%. The CRB Commodity Index was off 0.25%. Copper was up 3.56%. The Dow Jones US Specialty Real Estate Investment Trust Index was off 0.62%. The Vanguard Utilities ETF was off 2.42%. The dollar index was off 3.56% to close the week at 103.78. The yield on the 10-yr U.S. Treasury was up 8 bps to close at 4.30%.
Have a wonderful weekend!
Best Regards,
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
