Gold And Silver Stocks: Buy As Monetary Policy Is Relaxed

In June 2019, the HUI stood at 145 and since then has managed to regain some of its value by rallying to 210 for a gain of 45% in less than 2 months.

The European Central Bank will 'talk' rate cuts and possibly implement one when they meet this Thursday, July 25, 2019.

Keeping the bigger picture in mind, there is the constant shadow of yet another head fake which will deter some investors.

Gold and Silver mining companies have been making handsome gains on a daily basis.

Whatever you choose tread carefully, as this is going to be a rocky ride but do buy and buy now.

Preamble

Gold and silver stocks had been out of favor for years and as a result they have had to cut costs dramatically in order to avoid bankruptcy. The largely unhedged stocks as represented by the Gold Bugs Index, the HUI, fell from an all-time high of 630 down to 100, registering a loss of 84% reduction in their market capitalization.

In June 2019, the HUI stood at 145 and since then has managed to regain some of its value by rallying to 210 for a gain of 45% in less than 2 months.

Why the sudden interest

The main reason for this sudden change is the anticipated demise of the US Dollar as the Federal Open Market Committee (FOMC) meets on July 30 and 31, and it is a given that it will cut interest rates by twenty-five or possibly fifty basis points. This action by the FOMC signals to the market that all is not well, and it is trying to get ahead of the curve as the economy falters. This relaxation in monetary policy will weaken the US dollar and gold which has an inverse relationship with the US dollar will cost more in US Dollar terms as the US Dollar declines in value.

Central bankers will take a similar course of action in order to support the world economy as it begins to sputter. For instance, the European Central Bank will 'talk' rate cuts and possibly implement one when they meet this Thursday, July 25, 2019. Such an action adds weight to the premise that the expansion is coming to an end, so investors currently long the financial markets will be searching for a new home for their investment funds. All 'grist to the mill' for our tiny, beaten up, unloved sector of the market.

Chart of the Gold Bugs Index, the HUI: Ten-year period

The chart below is a snapshot of the last ten years for the HUI and it is an ugly picture. From 2011 until 2016 it was a slow death by a thousand head fakes. A rally in 2016 broke the downtrend; however, it didn't have the legs to hold the gains and drifted lower as investor interest dissipated.

Chart of the Gold Bugs Index, the HUI: One-year period

The chart below is a snapshot of the last year for the HUI and the picture is a lot brighter, exemplified by a stunning rally from a low 145 to a recent high of 215 in a space of two months. Keeping the bigger picture in mind there is the constant shadow of yet another head fake which will deter some investors. However, we should note that the stubborn resistance at the 180 level has been well and truly smashed, suggesting that there are better times ahead for the precious metal's producers.

Conclusion

1. We are entering a period of easier monetary policy by the central banks such as interest rate cuts and possibly more in the way of stimulus to support the global economy.

2. The expansion has run its course and is overdue a correction which will see the flow of funds out of the financial markets, some of which will land in the precious metals sector.

3. Gold has broken out of its stubborn resistance level of $1350/Oz and is now set to go a lot higher.

4. Earlier this year silver prices formed a double top at $16.20/Oz followed by a decline in prices. Silver prices have since recovered to close yesterday at $16.41, signaling that higher prices lay ahead of us.

5. Gold and Silver mining companies have been making handsome gains on a daily basis.

If this sector of the market is new to you then look to the good quality stocks as a starting point for your acquisitions. Some of these stocks are fairly priced and will do well when this rally gains momentum. Experienced investors may also consider some of the junior stocks which potentially have a much greater upside due to their leverage to the metals. The more aggressive speculator should also consider an options strategy based around this sector which could give your portfolio a real boost.

Whatever you choose tread carefully, as this is going to be a rocky ride but do buy and buy now.

The case for gold and silver will be discussed in future articles.

Got a comment, then please fire it in whether you agree with us or not, as the more diverse comments we get the more balance we will have in this debate and hopefully our trading decisions will be better informed and more profitable.

If you are not already a Follower and wish to see our posts on gold, silver and the associated stocks, then please hit the "Follow" button in order not to miss out.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: gold-prices.biz makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is neither a guide nor guarantee of future success.