Look at the surprise that is leading the gold and silver markets higher.
Gold & Silver Surprise
April 11 (King World News) – James Turk: The strength that we are seeing in gold and silver, Eric, is raising a key question. It is whether gold, silver, and the mining shares are finally going to break out from the trading ranges in which they have been stuck since August 2020.
The tops of those trading ranges are $2,070 for gold, $30 for silver, and 163 for the XAU Mining Share Index. When viewed in terms of weak foreign currencies like the Japanese yen and euro, those breakouts are already underway. That’s usually a sign that the breakout in US dollars is not far behind.
As the major stock market indices and most stocks have turned lower over the past several months, the gold mining shares have been heading in the opposite direction – higher.
The peak of the Dow Jones Industrial Average was 36,799 on Jan 4, 2022. On the same day the XAU Mining Share Index was 130.16. This past Friday, the DJIA closed at 34,721, down -5.6%. Over the same period of time, the XAU had risen to 163.67, a +25.5% jump. But that’s not all…
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The mining shares are leading the precious metals, which is important. They normally do lead in major bull markets because they have a relatively small market cap compared to the precious metals. Therefore, they are more sensitive to flows of capital. In other words, money moving out of other areas of the stock market and into the precious metal sector has a greater impact on the mining shares than the metals themselves, with the result that mining share prices respond with higher prices more quickly than the metals do.
King World News note: Despite volatility in the gold & silver markets, the HUI Gold Mining Index had another new CLOSING HIGH Friday (see below).
Mining Stocks Close At New High On Friday
James Turk continues: There is another important message when the mining shares lead. Namely, the flow of capital is larger than normal because the sector is attracting money from generalist funds and investors not normally invested in the sector. It is a sign that inflation psychology is taking hold and changing investment patterns and the flows of capital, just like it eventually did back in the early 1970s and then continued throughout that decade with money flowing into the precious metals and the shares of the companies that mine them.
Also, the mining shares have an inherent leverage that arises in an inflationary environment. For example, if a mining company is earning a $200 per ounce profit with the gold price at $1,950, their profit increases 50% to $300 with a 5% rise in the gold price to $2,050. That leverage attracts capital and ultimately results in higher multiples and higher prices for the shares of mining companies.
This chart of the XAU Index illustrates the potential. I’ve drawn it on a log scale so that the past doubling in price from 60 to 120 is the same distance on the chart as the doubling from 80 to 160. There is no guarantee of course that the XAU will double from here, but because it doubled in the last run-up of the precious metals, it could do it again. Sometimes history repeats.
XAU Mining Index Will Likely Double Mirroring
Pattern #1 At Beginning Of Chart Below
The uptrend marked #2 was not able to break out of the trading range. Uptrend #3 could do the same thing and stop here, but I don’t think so.
My expectation is that the uptrend #3 already underway will be similar to uptrend #1 in length and duration, meaning a double from here. Then the XAU will likely move into another trading range to consolidate it gains.
If I am right, it means that the XAU index has a long way to go, if it breaks out from its current trading range. That is what we will have to wait and see, but I don’t think we will have to wait long.
The outlook is very bright given all the bullish factors that are driving the precious metals higher – the most important of which is raging inflation that looks likely to get worse.
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To listen to Alasdair Macleod discuss Russia setting up the gold market for a massive short squeeze CLICK HERE OR ON THE IMAGE BELOW.
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