At the close of January, gold was up 5%, silver was down marginally and mining stocks were up 11% (according to the Van Eck Gold Miners ETF).
Considering mining stocks, the large-cap and mid-cap producers for the most part have outperformed the smaller-cap and micro-cap juniors. While some of the micro-caps have had some decent moves, most have not responded – or have barely responded – to the move in the sector.
During the eight-month and six-month run-ups in 2016 and 2020 respectively, the micro-caps went parabolic. With hindsight, I would suggest that trading behaviour was the signal that the sector rallies back then would be short-lived. The fact that the micro-caps are not going parabolic this time could be an indicator that the current bull cycle will be sustained for a longer period of time – like late 2005 to March 2008 and November 2008 to mid-2011.
After dropping to a low of around $1,640, gold has rallied back to over $1,900, just slightly below where it was when the rate-hike cycle began, while the FFR is now at a target range of 4.5%-4.75%. Silver was 4.4% below its price when the Fed began rate hikes compared to the S&P 500 and the Nasdaq, which were down 6.3% and 14.9%, over the same period.
I am expecting a big move higher in the precious metals sector this year, as the Federal Reserve will likely soften its stance later this year. Some other major central banks have already begun to ease their monetary policy. The markets, particularly the precious metals sector, will anticipate this coming shift in Fed policy with a bullish move in advance of the actual event. The move higher in gold during January could be the start of this revaluation, with silver soon to follow gold higher.
Another significant factor that should reprice the precious metals sector higher is a growing shift away from the U.S. dollar by eastern bloc countries, the BRIC consortium and OPEC nations.
Based on a strengthening of the fundamental factors that drive the prices for gold and silver – and thereby the mining stocks – I believe we are seeing the onset of a bull cycle for the precious sector. As such, I expect that the prices of gold and silver will be considerably higher by the end of the year.
Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.