Breakout

After a few false starts, gold has finally broken through $1300 convincingly, and looks comfortable at its current perch at $1340. It would be easy to blame it all on politics but, as I noted in the last issue, I don’t think that’s the case.  It’s an overdue move and the initial move through $1300 occurred before Kim’s provocative launch of a missile over Japan.

Politics is an issue too, as we saw when gold dropped $10 when a bipartisan agreement was reached to push the debt ceiling fight back three months.  But, again, it’s important to note gold bounced back from that loss almost immediately. There are a lot of moving parts at play in the market and most seem to favour gold for a change.The strength in base metals is equally noteworthy. Markets don’t seem to be discounting some sort of crash or deep economic slowdown. We wouldn’t see base metals trading as strongly as they are in that scenario.

Discovery stories are delivering large gains again. The broader resource market still needs to strengthen but, if major markets hold up and we get more good news from the field, the bullishness in resource stocks should broaden. Even so, we’ll try to keep our focus narrow and stick to high quality developers and continue looking for potentially exciting new discovery stories like the silver explorer that is added to the HRA list this issue.

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The trends discussed in the last issue, especially those that matter most to us as resource speculators, have strengthened. Gold is trading well above $1300 and seems comfortable there. Copper has moved more than I expected and now sits above $3/pound while zinc is holding its gains and trading just above $1.40/lb.  

The moves have been driven by a number of factors, some discussed below, but the important point for us is that the resource sector now has a backdrop similar to early 2016. Higher metals prices, a generally “risk-on” market and lots of sideline money have set us up for what should be a strong autumn performance.

The gold chart below shows a clear breakout, something we’ve been waiting months to see. As recently as the date of the last issue it looked like the latest rally might have failed again before things turned positive in dramatic fashion. 

Interestingly, and perhaps significantly, traders were at a loss to come up with a reason gold suddenly drove hard through the $1300 level.  There were political rumblings and after effects of central banker Jackson Hole speeches, but nothing that matches the timing that well. 

There would have been a lot of buy stops placed around the $1300 level by traders that were short. That definitely helped the bulls once that level was reached but doesn’t explain the original buying. Note too the volume bars on the right side of the gold chart. The buying volume was heavy though gold still can’t be considered “overbought” technically.