A Gold Correction Was Expected After Nine Straight Weeks Of Gains

The price of gold had its first down week since early June, ending a spectacular nine-week rally, the likes of which we haven’t seen since 2006. The yellow metal briefly fell below $1,900 an ounce last Wednesday as stocks neared their all-time closing high and the 10-year Treasury yield jumped on record supply. Wednesday’s $38 billion auction of 10-year government bonds was the largest in U.S. history.

As I shared with you last month, gold was looking overbought at more than two standard deviations, so a short-term correction was to be expected. 

It’s important to keep in mind, though, that the metal’s long-term drivers remain intact. We have unprecedented monetary and fiscal stimulus, with more potentially on the way. There’s still trillions of dollars’ worth of global government debt trading with a negative yield.

Despite the correction, gold continues to trade in a golden cross. That’s when the average price for the past 50 trading days is above the average price for the past 200 trading days, and it’s typically seen as a bullish signal. The current golden cross has been in place for more than 18 months now.

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Where’s the Inflation?

I believe the one factor that’s missing from this bull run is inflation. Since the financial crisis, we really haven’t seen a significant change in consumer prices, if we’re using the Bureau of Labor Statistics’ (BLS) gauge.

We may be on the verge of a new inflationary period, however, based on the latest report by the BLS. On a month-over-month basis, core inflation—that’s inflation on all items excluding volatile food and energy prices—rose 0.6 percent in July. That may not sound like much, but it’s the biggest such increase since 1991.   

According to the bureau, the monthly change was led by a sharp rise in auto insurance prices. Other increases were seen in shelter, communication, medical care and used cars and trucks.

Historically, inflation has been constructive for the gold price. As the purchasing power of the dollar falls, savers and investors may seek other, more reliable stores of value, including the yellow metal.

Royalty Companies Report Strong Revenue

Not all explorers and producers in the investable universe have reported second-quarter earnings yet, but those that have are sharing strong results. Royalty firm Franco-Nevada reported $91.8 million in net income, an increase of 43 percent from the same quarter a year earlier, on revenue of $195.4 million. Franco received a Buy rating from Raymond James following the earnings report, with analyst Brian MacArthur writing that the company “has a strong balance sheet to finance potential future deals and support its dividend, which has increased every year.” The company continues to be debt-free.

Fellow royalty and streaming company Wheaton Precious Metals also had a blowout quarter. The company reported $105.8 million in net income, substantially beating Wall Street estimates of around $80 million. Revenue also beat for the quarter, and in fact, Wheaton generated record revenue for the first half of the year. Total revenue was more than $503 million, an increase of 21 percent over the same six-month period in 2019.

  During the earnings call, Wheaton President and CEO Randy Smallwood expressed optimism in the company’s growth prospects, the pandemic notwithstanding.

“Given the bullish precious metals markets, the strength of our business model and our high-quality portfolio of assets, we remain confident that we can continue to create sustainable value for our stakeholders. Not only that, but we remain optimistic that we will be able to continue growing the company and add additional production from long-life assets producing in the lowest half of their respect cost curves,” Randy said.

Improved China PMI Lifts Oil

Crude oil hit a post-pandemic high last week, rising to nearly $43 a barrel on Wednesday as domestic crude supply fell for a third straight week. Consumption has also improved in China, where manufacturing activity continues to expand following countrywide lockdowns. The official China manufacturing purchasing manager’s index (PMI) ticked up to 51.1 in July, representing the fifth straight month the gauge has been above the 50.0-line separating expansion from contraction. The private Caixin/Markit PMI, meanwhile, came in even higher at 52.8.

As I’ve pointed out many times before, PMI is a forward-looking indicator that can help investors get a sense of where commodity prices might be headed one to six months down the road. That’s because one of the things PMI looks at is new orders. If factories are receiving a wave of new orders for, say, automobiles, you can reasonably expect that they will need to consume more energy to run their operations, not to mention use more metals and other raw materials.

All of this activity is supportive of commodity prices—oil’s especially, based on China’s PMI data above.

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