10 reasons to be bullish the gold complex in 2022

With bearish gold headlines making the rounds as the new year came to a close last week, you would think bullion was down double-digits in 2021. But after gaining a stellar 18% in 2019, then another 24% in 2020, the gold price consolidated those huge gains as much as 20% by Q2/2021 and ended last year down just 3.5%.

The gold price has entered the new year by continuing to whipsaw investors on both sides of the trade. The first week of 2022 began with volatile trading on either side of the key $1800 level until the Federal Reserve minutes from December, released on Wednesday, pulled the rug out from under the bulls.

The gold price was sold down along with the stock market immediately after the minutes revealed that policymakers agreed to hasten the end of their pandemic-era program of bond purchases, and issued forecasts anticipating three quarter-percentage-point rate increases during 2022. Although equity weakness was bought the following Thursday, the gold complex has seen continuous pressure into this morning’s U.S. Non-Farm Payrolls (NFP) Report.

Meanwhile, the precious metals mining complex has seen continued broad-based selling into the first week of 2022, showing renewed relative weakness to the gold price. The combination of the S&P500 making seventy all-time highs in 2021, along with delayed assay results creating a news-flow void, has kept the relatively tiny junior mining sector off the radar of most speculators. And the selling has increased into the new year despite the gold price remaining in an uptrend since August of 2021.

Moreover, although we have seen the inflationary result expected from trillions of U.S. dollars being created by the world’s largest central bank, the gold price not reacting as expected has kept generalist investors out of the gold complex for the past seventeen months as well.

With most investors ignoring the values being created by apathetic resource stock speculators, while generalist investors remain oblivious to this tiny sector, we are seeing an opportunity similar to when the mining space was carving out a significant bottom in late 2015, and again in late 2018. A 3-year pattern of creating significant bottoms in the mining complex during Q4 of 2015, 2018, and possibly 2021, is clearly evident when studying the monthly chart of precious metal’s sector bellwether Barrick Gold (GOLD).

In regards to late 2015, the macro environment six years ago was very similar to the current economic climate in regards to the impending Federal Reserve rate-hike cycle. During a brutal gold bear market from 2012 to 2015, the GDXJ fell over 80%, taking many investors out of the sector and vowing never to return.

Once the selling finally began to subside in the summer, the junior miner ETF began to create a 6-month accumulative flat bottom in late Q3/2015 as the Fed began to jawbone the first rate-hike cycle since the global financial crisis of 2008.

By the time the world’s largest central bank officially announced the first 0.25% rate hike in mid-December of 2015, the policy change became a “buy the news” event for the gold price which created a significant bottom at $1045. Although GDXJ continued to trade sideways for another month, by mid-2016 the junior miner ETF had zoomed over 260%, while many select juniors moved up 10x-15x.

On Thursday, St. Louis Fed President James Bullard said the Fed could raise interest rates as soon as March and is now in a “good position” to take even more aggressive steps against inflation, as needed, after a policy reset last month. Therefore, it is reasonable to assume the Fed could very well telegraph the beginning of the impending rate-hike cycle at the next FOMC meeting on January 25-26.

Despite the continued under-performance for gold as we begin the new year, the fundamental backdrop in 2022 for precious metals and related mining share prices continues to strengthen. Below are 10 reasons why I expect the gold price to eventually rise above $2,000 per ounce in 2022, along with the mining sector creating a significant bottom in Q1/2022:

  • Inflation has become increasingly problematic and more persistent than previous sanguine assessments by Federal Reserve Chairman Jerome Powell and other Fed officials.
  • Real interest rates are expected to remain deeply negative. Higher inflation combined with continued low interest rates should ensure negative real rates, always a strong buy signal for gold investors. The average annual return on gold during periods of negative real interest rates has been a stellar 21%.
  • The Federal Reserve’s more aggressive tapering and the expectation of three rate hikes in 2022 have already been largely priced in. Fed futures on Thursday signaled as high as an 81% chance of a rate hike cycle beginning in March. This means that any new fear could change the outlook and benefit gold.
  • Geopolitical fears include the ongoing threat of war between North and South Korea that would draw in the United States; tensions between the U.S., China and its neighbors over Taiwan; tensions between NATO, the EU and the U.S. with Russia over Ukraine creating a “Cuban Missile Crisis” type situation; a high-altitude military buildup on the China-India border, where India is rushing construction of a series of new tunnels and roads, and most recently, Kazakh President Kassym-Jomart Tokayev accepted the government’s resignation on Wednesday, after a fuel price increase in the oil-rich Central Asian country triggered violent protests.
  • The global economy is beginning to sputter. Spreading economic weakness will make any tightening moves by central banks difficult to implement without broader repercussions. The Fed is severely constrained in how much it can raise rates due to ballooning interest payments on its nearly $30 trillion national debt.
  • During the last tightening cycle, between late 2015 and 2019, the Federal Reserve raised interest rates nine times and gold prices rallied nearly 35%. And between 2004 and 2005 the U.S. central bank raised rates 17 times and gold prices rallied 70%. Also, in the 1970’s, rates went from 4.75% in 1976 to peak at 20% in 1980. During that same period, gold rose from $185 an ounce to $850 per ounce.
  • Physical gold buying centered in India and China has risen dramatically. Indian demand alone was over 500 tonnes greater in 2021 than it was in 2020, more than enough to absorb current mine supply.
  • Net buying of gold bullion by central banks is likely to continue and may possibly increase. Recently, both Singapore and the Irish central banks purchased gold for the first time in over a decade due to inflationary concerns.
  • Positioning by commodity traders is at negative extremes and is usually followed by short-covering rallies. The selling of paper gold on the thesis of Fed tightening is mostly priced into the market.
  • Gold mining equities are trading at deep value while generating record cash flow. Meanwhile, the GDXJ is trading at consistent levels last seen when gold was trading at $1500 per ounce.

With most resource stock speculators and generalist investors continuing to avoid the precious metals space during the first week of 2022, this is a great time to accumulate a basket of quality juniors de-risking large, high-margin projects with 5x-10x upside potential from current depressed levels.

The Junior Miner Junky service provides complete transparency into my trading activities and teaches investors how to successfully navigate this high-risk/high-reward sector. Subscribers are provided a carefully thought-out rationale for buying individual stocks, as well as an equally calculated exit strategy. If you require assistance in accumulating a basket of quality precious metal’s juniors with 5x-10x long-term upside potential, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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