Will Gold Surge After the G-20 Meeting?

Financial market volatility is ruthless.

After the worst yearly start in history, US stocks jumped last week. It’s the second week in a row they’re up.

The US S&P 500, the large-cap benchmark, rose 1.6% to close the week at 1,948.05 points. The Dow Jones Industrial Average Index, the institutional money index, gained 1.5%. It closed the week at 16,639.97 points.

Aussie shares didn’t fare so well…

Following weak earnings reports, the ASX 200 closed 1.5% lower. The benchmark index stands at 4,880 points. Consumer staple stocks were the worst performers. Energy stocks saw another pullback, with crude falling. And renewed speculation of a property crash hit banking stocks.

Gold stocks have held up well.

But what’s next?

Is there any hope for Aussie stocks?

To start, not all hope is lost for Aussie stocks. The Sydney Morning Herald reported,

AMP Capital chief economist Shane Oliver said that “overall, results were much better than feared”. Of the season’s results, 47 per cent bettered expectations, 21 per cent came in in worse than expected, 66 per cent revealed profits up on a year ago and 64 per cent raised their dividends.

While the broader market sounds OK, Oliver said ‘It’s tough out there for resources stocks but no more than expected.

Indeed, resource stocks have been a disaster. Investors have prayed for higher prices, but they haven’t come. The mining downturn is really starting to take its toll in the stock market. Blue chip and quality resource stocks are all starting to get hit hard.

Among the mining blue chip stocks, BHP Billiton [ASX:BHP] sank 6.1% to $15.59 per share last week. The Sydney Morning Herald reported, ‘”We now have to recognise we’re in a new era, a new world,” said Andrew Mackenzie this week, as he explained why BHP Billiton would be cutting dividends by 74 per cent.’

If you’re a long term reader, BHP’s dividend cut shouldn’t be a surprise. On 11 December last year, to sum up a lengthy analysis, I said:

While it looks cheap on paper, I’d stay clear from BHP for now. With falling commodity prices and US$3.5 billion in debt due next year, there’s a good chance BHP’s dividend will be cut for the first time in decades. That means less income from your shares, and likely a lower share price as shareholders sell out to seek returns elsewhere.’

I hope you haven’t bought any BHP shares. With the current resources environment, BHP could easily fall to $10 per share this year. Especially if we see a decent stock market correction. On another note, if you want to buy BHP shares, check out Resource Speculator. I suggested readers short it at nearly US$30 per share. I’ll recommend buying it, when the time is right.

Fellow blue-chip minor, Rio Tinto [ASX:RIO] fell 6.1% to $40 per share last week. While BHP has halved, Rio Tinto’s share price down by only 37% in the past 12 months.

Rio is a punt on iron ore prices. Iron ore has done quite well this year. It’s trading above US$50 per tonne — up a stunning 36% from near decade lows hit on December 11. Interesting, the fundamental story for iron ore is atrocious. According to mining.com,

World Steel Association data released on Monday [last week] showed a sharper-than-expected drop in global steel output of 7.1% in January compared to last year. Production by Chinese steelmakers, which consume nearly three-quarters of the seaborne iron ore supply and forge nearly half of the global total, plunged 7.8% year on year following a 5.2% contraction in December.

Capital Economics forecasts a 5% fall in China’s steel output for the whole of 2016 but the London-based research company warned on Tuesday “this may have to be revised lower if this pace of output cuts is maintained.”

In my opinion, iron ore is due for new lows this year. Adding to the supply issues, economic growth is depressed with rising taxes, and we’re already at peak debt. This won’t help the demand side. I wouldn’t be surprised if prices fell below US$35 per tonne. If this happens, Rio Tinto could be the best shorting opportunity this year.

Thankfully, with all the depressing news, there’s also been a bright light in the resources industry…

Will gold’s surge last?

Gold stocks have gained on the traditional flight to safety trade. According to goldseek.com,

Gold is on a monster run already in 2016, gaining nearly 20%, while the rest of the market remains mired deep in the red.

But many of you are sitting on the sidelines, fearful that you’ve missed gold’s move.

Don’t worry: You haven’t missed it. In fact, this is just the first inning of a monster bull market for gold mining stocks. And it’s going to allow you to buy gold 50% off from its current price and you could make 100% to 200% over the next 12 months.

I love reading bullish news on gold. Most punters assume, just because a stock or sector is rising, that it will last forever. But how did this go for iron ore, nickel, BHP, Rio Tinto, and the banks? I could go on.

Punters lose money because their opinion moves with the trend. They see gold moving up and believe it will never end. Every single bear market rally, gold bugs assume it’s the last. Yet gold has fallen for five straight years.

Unfortunately, most punters get sucked into the bear market rally near its peak.

This time will be no different. While gold could see a strong rise this week, it should mark the peak in this bear market rally. Reuters reported mixed messaged from the G20 finance meeting over the weekend. It said,

Setting the tone for the Shanghai meeting of the Group of 20, China’s central bank chief, Zhou Xiaochuan, said Beijing still had the room and tools to support the world’s second largest economy. Germany, however, all but ruled out any coordinated stimulus to counter a deepening global chill.

Market’s don’t like mixed messaged. This may be good news for gold bugs. The Wall Street Journal reported,

The G-20 said “downside risks and vulnerabilities have risen,” pointing to volatile capital flows, the commodity price plunge and a potential exit of the U.K. from the European Union in a list of threats to global growth.

German Finance Minister Wolfgang Schäuble said debt-financed fiscal policies and easy money monetary policies may have prevented the financial crisis from spiraling out of control, “but they may have laid the foundation for the next crisis.”

Reviewing the G-20 meeting, gold could surge on the ‘uncertainty trade’ this week. But, it may not last. In my view, the ‘less rosy’ news is nearly priced into financial markets. So anyone buying gold shares this week may lose more than just their shirt. The chances of a decent crash in the weeks ahead are high.

If you want to know more about this story, check out Resource Speculator. I provided a lot of analysis on gold last week, and I’ll provide more this week. If there’s another financial crisis — which is inevitable — like German Finance Minister Wolfgang Schäuble warns, gold might not be as safe as you think.

If you want to know more on this story, click here.


Jason Stevenson,

Resources Analyst

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia