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Minyan Mailbag: Gold Fields Under Pressure


Looking at bottom in gold miners.


Prof. Lewis,

Do you have any thoughts on why Gold Fields
(GFI) makes new lows daily? Also, Do you see a bottom for gold and gold mining stocks? I'm trying to hang in there. As always, I appreciate your thoughts.

-Minyan Kathy


GFI is just under pressure with the rest of the golds even as its fundamentals continue to improve. The rand is down over a percent vs. the dollar today despite South Africa raising rates (a falling rand means GFI's margins increase). A rising gold/falling rand environment is the "sweet spot" for GFI, just as we saw in 2002 when GFI went up four-fold. I've been buying October calls on the stock and continue to add to them today.

Click to enlarge

Do I see a bottom in gold and gold mining stocks? In short, yes.

Despite the dollar index making another new high for the move since its March low today, gold once again refused to take out its May 1st low despite an enormous amount of short selling in the futures (no doubt strong dollar bets). The longer gold refuses to buckle as the dollar index rises, the more people are going to take notice.

People don't seem to get it with respect to gold, just as they didn't seem to "get it" about oil. Remember when people thought oil would go down if the dollar index bottomed? Since March, when the DXY bottomed, oil has rallied $40. Oil, food, and gold aren't going up because of the weak dollar. They're rising due to global inflation. The dollar has been weak because the Federal Reserve has been easier on inflation relative to the rest of the world. A moment of clarity is coming very soon when people see gold, oil, and the CCI continuous commodity index rally to new highs despite the dollar index continuing to rally, based on all the tough Fed talk.

Click to enlarge

Don't forget the dollar index bottomed in 1978 during that stagflationary environment. Even as the Fed began to slowly raise interest rates after that bottom, gold quadrupled and inflation roared all the way to 1980 until Volcker finally stopped it in its tracks with double digit interest rates.

What will a 25 bp hike in September do to inflation and gold today? Absolutely nothing. The fact is that the banking system is too weak for the Fed to get aggressive against inflation or even to raise interest rates anytime soon. All it can do is talk tough for now.

Inflation won't peak until long after the Fed begins to tighten. This key fact is what people seem to be forgetting.

-Prof. Lewis

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Position in GFI October calls.

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