Aussie gold stocks just found a base

Tuesday, 5 October 2021 — Albert Park

[2 min read]

Dear Reader,

In early March came the bounce out of the previous downtrend. But it didn’t hold…and gold stocks have dropped back — further than I thought they would.

And yet gold remains a stonking AU$2,426.

Thus far, the spot price has managed to hold US$1,700 when it’s pressed down toward that level.

Gold is practically the only commodity that has taken off lately. There’s something odd — even suspicious — about that.

Regardless, gold mining equities are trading on very small valuations currently.

My colleague Greg Canavan slammed this point home recently via this chart…

But markets trade on expectations. Is gold bullish or bearish?

We know that ‘real’ interest rates are still negative. Gold normally thrives in that environment — if not lately.

We also know that many investors consider gold a hedge against ‘chaos’.

There’s plenty of that currently in both international trade and energy markets.

Consider that there are ships stranded in the ocean off the coasts of both the US and China because they can’t land at port.

There are COVID disruptions, truck shortages, and energy prices skyrocketing. Natural gas prices in the UK are up 300%. The British Army is delivering petrol.

This looks chaotic to me.

I can tell you today that the gold sector is catching a bid. As I write, Northern Star Resources Ltd [ASX:NST] — just to pick one — is up 2.5%.

The gold sector may have found its base here.

But clearly, it’s the US market that will set the tone. Bargain hunters, speculators, and general misanthropes should be watching gold like a hawk from here.

Make sure you follow the work of my colleague Brian Chu at his service Gold Stock Pro.

Is this going to stop the boom? Probably not, unless they are so draconian that the government missteps badly.

Perhaps a more important story is one I picked up on in the Australian Financial Review this morning.

It’s the fact that developers in Melbourne are shrinking their housing lots down to 350 square metres in the outer suburbs.

This to keep entry-level townhouses in the range of first home buyers.

This type of thing is one way the housing cycle can keep going longer than most people think.

It keeps affordability in range. You might object that buyers are getting less for their money.

And indeed, they are.

But, frankly, that’s their problem. As long as politicians and banks can keep the game going, generally, everyone else is happy.

The developers aren’t being greedy by the way. It’s just that they need to make their developments pay.

Rising land costs make this more difficult. They can only cut labour and materials so far.

Suffice to say, I pay no attention to any of the uber housing bears, though there are a lot less of them than there used to be.

I have been pointing out structural issues like this for nearly 10 years now. The Daily Reckoning archive is full of articles on the issue.

All the signals point to the housing cycle running for a few more years yet. The difference now compared to say, 2015, is the best growth will be found outside of Sydney and Melbourne.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia