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Counting Down the Top Drill Holes of 2021

Source: Streetwise Reports   12/28/2021

On any given business day, results from a drill hole can turn a Wednesday into Christmas Day for shareholders….

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This article was originally published by Streetwise Reports

Source: Streetwise Reports   12/28/2021

On any given business day, results from a drill hole can turn a Wednesday into Christmas Day for shareholders. We take a look at what experts think are the best drill holes of 2021.

Drill holes are junior mining’s lifeblood. They can drive investor interest, make companies and cement reputations.

There was a lot of movement in 2021, and Streetwise Reports is counting down the Top Five.

Newsletter writer John Kaiser, editor of soon-to-launch Kaiserresearch.com, has made a career of looking at drill results on behalf of retail investors to determine whether or not those results have merit.

Drill bitKaiser says some of the industry’s big discoveries were part of well-planned exploration programs, but some of the biggest were essentially flukes. 

“At Fruta del Norte when (Aurelian Resources) drilled that deep hole and intersected 200 meters of really high-grade (gold), that took the stock from 60 cents to two-and-a-half dollars,” Kaiser tells Streetwise. “It was blind hole, too. (Aurelian) had chewed through (about) $19 million and accomplished nothing and then went for this ‘Hail Mary’ hole and it was like catching a touchdown in the endzone to win the Super Bowl.”

The drill hole Kaiser referred to hit 189 metres averaging 24 grams gold per tonne (24 g/t gold) in 2006 at the Fruta del Norte gold project in Zamora Chinchipe province, Ecuador.

Aurelian went on to drill off a 13.7 Moz gold resource there before Kinross Gold Corp. (K:TSX; KGC:NYSE) launched a takeover bid worth about CA$1.2 billion in July 2008. After political tangles stalled development, Lundin Gold Inc. (LUG:TSX) bought Fruta del Norte in 2014 for about $240 million, made nice with the locals, and poured its first gold in 2020.

This year proved a banner year for drill results as gold prices flirted with US$1,900/oz for the better part of 12 months; silver spent much of 2021 well above US$22, almost double its 10-year low of US$12.47 in March 2020; and copper consistently tested US$4.80/lb, up from a five-year low of US$2.25/lb in April 2020.

For our purposes, the criteria were simple: these drill results had to contain significant gold, be published in 2021 and ultimately move the needle on the share price.

Here are the Top Five Drill Holes of 2021:

5. Satori Resources Inc. (BUD:TXS.V), Drill Hole TLMZ21-12

 

Commodity: Gold

Project: Tartan Lake

Intersection: TLMZ21-12 intersected 5.8 meters averaging 47.56 g/t gold, inside a broader interval of 12.6 meters averaging 23.76 g/t gold

Where: Flin Flon Greenstone Belt, northern Manitoba

Ownership: 100% Satori Gold

Overview: Satori was late to the party but made the cut after a news release on Dec. 6 reported that hole TLMZ21-12 intersected 5.8. meters averaging 47.56 g/t gold at the Tartan Lake Gold Project in Manitoba. It was part of a longer interval of 12.6 meters averaging 23.76 g/t gold.

The hit is thought to be a new zone of mineralization, sub-parallel to the main zone.

Holes TLMZ21-12 and TLMZ21-11 12 both targeted the down plunge continuation of the main zone mineralization. TLMZ21-11 intersected 5.3 meters running 2.25 g/t gold in the Hanging Wall (HW) zone followed by 2.1 meters of 8.87 g/t gold in the main zone.

TLMZ21-12 is the second highest grade interval ever reported at Tartan Lake, which operated from 1987 through 1989 and produced slightly less than 36,000 oz gold.

Kaiser lists Satori among his “Bottom Fish” picks.

“(Tartan Lake) is one of those orogenic high-grade (gold) systems in Manitoba. It was improperly developed and then abandoned and then sold,” Kaiser tells Streetwise. “(President and CEO) Jennifer Boyle and (director) Wes Hanson are now trying to revive it and demonstrate that these high-grade veins extend vertically. The trick is that the deeper you go in these sub-vertical systems the more expensive the holes become and the longer it takes. So they’ve been busy working to extend the down plunge potential of the (mineralized gold) system to show that there’s enough gold bearing ‘meat’ present to justify redeveloping this system.”

Shares of Satori closed at $0.165 on Dec. 8., two days after news of TLMZ21-12 hit the market, a 37.5% bump from the $0.12 close on Dec. 1.

It seems like Boyle and her team have things moving in the right direction.dfssa

4. Kenorland Minerals Ltd. (KLD:TSX.V; 3WQO:FSE), Drill hole DDH 21RDD024

 

Commodity: Gold

Project: Frotêt

Intersection: 5.72 meters running 90.56 g/t gold, including an interval of 3.89 meters grading 132.57 g/t gold (DDH 21RDD024) on the Regnault (R1) deposit

Where: Frotêt-Evans Greenstone Belt, James Bay lowlands, northern Quebec

Ownership: Kenorland Minerals, 20%; Sumitomo Metal Mining Co. (SMMYY:OTC), 80%. Kenorland is the operator.

Overview: The remarkable DDH 21RDD024 was hit during follow-up drilling at its Frotêt gold project in northern Quebec. Kenorland was seeking greater understanding of the east-west orientation of the mineralized structures in the Regnault deposit. The junior discovered the Regnault gold system and the R1 structure early in 2020 when hole DDH 20RDD007 hit 29.08 meters grading 8.49 g/t gold.

“Regnault is emerging as a very interesting new discovery… (Kenorland) has secured a strategic partner (Sumitomo) that will have the funds for any (capital expenditures), which takes away some of the financing risk. KLD-V is one to watch,” Mining Analyst Eric Lemieux told Streetwise in July.

In November, Sumitomo Metal Mining Canada bought 5.2 million common shares in Kenorland at $1 apiece. Sumitomo now owns 10.1% of Kenorland’s outstanding shares. About 80% of the money is earmarked for further exploration, while the rest will cover general expenses.

3. HighGold Mining Inc. (HIGH:TSX.V; HGGOF:OTCQX), Drill Hole JT21-125

 

Project: Johnson Tract

Intersection: 56.6 meters at 18.69 g/t gold, 3.9 g/t silver, 2.43% zinc, 0.47% copper, and 0.36% lead, including an eye-popping interval of 32.9 meters running 31.69 g/t gold, 5.1 g/t silver, 1.82% zinc, 0.58% copper, and 0.47% lead.

Where: Alaska

Ownership: 100% HighGold Mining (Cook Inlet Region, Inc. [CIRI], one of 12 land-based Alaska native regional corporations created by the Alaska Native Claims Act of 1971, has a back-in right for up to a 25% participating interest).

Overview: HighGold Mining has been steadily building the resource and de-risking the project since acquiring John Tract in 2019. And with mining financiers Eric Sprott and Robert McEwen aboard, it won’t have to worry about financing. It currently has about $26 million in the kitty.

 

An initial resource estimate published in June 2020 reported 2.7 million indicated tonnes grading 6.1 g/t gold, 6 g/t silver, 0.6% copper, 5.6% zinc and 0.8% lead, the equivalent of roughly 750,000 oz gold. Another 0.6 Mt inferred tonnes grading @ 2.1 g/t gold, 9 g/t silver, 0.5% copper, 6.7% zinc, and 0.3% lead works out to about 134,000 oz gold, and that was before hole JT21-125.

An updated resource estimate is expected in the first half of 2022.

Southeast of JT21-125, drill hole JT21-123 hit 4.3 meters grading 13.1 g/t gold, 200 g/t silver, 4.9% zinc, 2% lead and 0.40% copper, which basically confirms the down-plunge strike expansion of Johnson Tract.

“Joe Mazumdar and I think the Johnson Tract deposit is a hybrid VMS (volcanogenic massive sulphide), late intermediate sulphidation overprint. There are also epithermal showings, possibly related to a separate porphyry,” says geologist Brent Cook, former editor of the Exploration Insights newsletter. “Joe Mazumdar has worked up a rough resource estimate and thinks 750,000 to 1 million oz is a reasonable target for the main deposit. Good potential outside of this.”

HighGold closed at $1.75 on Oct. 6, the same day news of JT21-125 became public, up from $1.01 the day before ­– a one-day 73% spike in the share price.

2. NGEx Minerals Ltd. (NGEX:TSX.V), Drill Hole LHDHG03

 

Commodity: Copper, Gold, Silver

Project: Los Helados

Intersection: LHDHG03 returned 1,134 meters grading 0.79% copper-equivalent (CuEq) (0.59% copper, 0.30 g/t gold, and 1.9 g/t silver), including a higher-grade interval of 440 meters running 1.03% CuEq (0.82% copper, 0.31 g/t gold, 2.9 g/t silver)

Where: Chile

Ownership: 64% NGEx; 36% Japanese company Nippon Caserones Resources

Overview: While LHDHG03 was published in 2021, it was actually drilled in 2015 as part of a program to collect whole-core geotechnical data. It wasn’t assayed until this year but was worth the wait.

LHDHG03 returned 1,134 meters grading 0.79% CuEq (0.59% copper, 0.30 g/t gold, and 1.9 g/t silver), including a higher-grade interval of 440 meters running 1.03% CuEq (0.82% copper, 0.31 g/t gold, 2.9 g/t silver). It’s part of a much larger copper-gold porphyry deposit and will be part of an upcoming revised resource estimate.

NGEx boasts that Los Helados is the fourth largest copper discovery in the last 10 years.

Using $3.00 copper and $1,300 gold, Los Helados contains a National Instrument compliant indicated resource of 17.6 billion pounds copper and 10.7 Moz gold, as well as an inferred resource of 5.8 billion pounds copper and 2.7 Moz gold.

NGEx was created in 2009 by the Lundin Group to honour patriarch Adolf Lundin (1932-2006). NGEx = No Guts (No Glory) Exploration.

The junior closed at $1.55 on Dec. 21 on volume of 118,000 shares, up from $0.72 when news of LHDGH03 was published Sept. 8.

1. Filo Mining Corp. (FLMMF:OTCMKTS), Drill Hole FSDH041

 

Commodity: Copper, gold, silver

Project: Filo del Sol

Intersection: 858 meters grading 1.8% CuEq (0.86% copper; 0.7 g/t gold, and 48.1 g/t silver) or from 188 meters below surface. The hole had an even sweeter interval of 163 meters running 2.31% copper, 2.07 g/t gold and 183 g/t silver or 5.43% CuEq.

Where: San Juan province, straddling the border between Argentina and Chile (it is subject to the Mining Integration and Complementation Treaty for cross-border projects between the twcountries).

Ownership: 100% owned by Filo Mining (about 34% of Filo is owned by the Lundin Family Trust, AKA the Lundin Group. Lukas Lundin is a director, while Adam Lundin is chairman)

Overview: This is the King Daddy Topper—Filo Mining’s FSDH041—the longest high-grade intersection yet in what is thought to be one of the feeder zones to the high-sulphidation epithermal mineralization at Filo del Sol.

The mind-blowing thing about this hole is that even after 858 mineralized meters, the hole ended in mineralization at a depth of 1,046 meters.

On May 12, Filo Mining closed at $4.13. A day later, when the news of FSDH041 reached the market, it spiked to an intraday high of $8.49 and closed at $7.69 – an 86% pop. It closed at $11.73 on Dec. 21.

Filo Mining acquired the project when it was spun out of NGEx in 2016.

FSDH041 is part of a cluster of stunning holes at Filo del Sol, which includes FSDH046, the deepest hole drilled at Filo Del Sol to date — and probably the second-best drill hole of 2021.

It returned 676 meters at 0.92% CuEq (0.57% copper, 0.34 g/t gold, and 11.3 g/t silver) from a depth of 380 meters within a longer interval of 1,378 meters running 0.71% CuEq (0.45% copper, 0.29 g/t gold, and 6.1 g/t silver) from a depth of 77.7 meters.

FSDH046 ended almost 1.6 km below surface ­– and it is not included in the current resource.

There are five drill rigs currently turning at Filo Del Sol. The company expects to add two more in 2022 to further define the sulphide resource and see how far out the mineralization extends.

After Filo published FSDH041in May, rogue mining analyst Mark Turner, editor of the controversial IKN blog, wrote: “It must be a thing to witness the core coming up (from the drill), as you know every length is adding millions of dollars to your company’s market cap. Hole of the year, period.”

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Disclosures:
1) Brian Sylvester compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. He or members of his household own securities of the following companies mentioned in the article: None. He or members of his household are paid by the following companies mentioned in this article: None. His company has a financial relationship with the following companies referred to in this article: None.
2) Joe Mazumdar: I own, or my family owns, shares of the following companies mentioned in this interview: HighGold Mining. I personally am, or my family is, paid by the following companies mentioned in this interview: None.
3) Brent Cook: I own, or my family owns, shares of the following companies mentioned in this interview: HighGold Mining. I personally am, or my family is, paid by the following companies mentioned in this interview: None.
4) Eric Lemieux: I own, or my family owns, shares of the following companies mentioned in this interview: Kenorland Minerals Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None.
5) John Kaiser: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None.
6) The following companies mentioned are billboard sponsors of Streetwise Reports: Kenorland Minerals Ltd.  Click here for important disclosures about sponsor fees.  
7) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
8) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
9) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Kenorland Minerals Ltd., a company mentioned in this article.

( Companies Mentioned: FLMMF:OTCMKTS, HIGH:TSX.V; HGGOF:OTCQX, KLD:TSX.V; 3WQO:FSE, NGEX:TSX.V, BUD:TXS.V, )

tsx nyse otc otcqx tsxv gold silver copper zinc tsx-lug lundin-gold-inc lundin gold inc tsxv-fil filo-mining-corp filo mining corp tsxv-high highgold-mining-inc highgold mining inc tsxv-kld kenorland-minerals-ltd kenorland minerals ltd tsxv-ngex ngex-minerals-ltd ngex minerals ltd tsxv-bud satori-resources-inc satori resources inc

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Precious Metals

Confessions of a Day Trader: Pump up the volume, this one’s in the bank

This week saw the day that APT traded with a 6 in the front. Amazing to think that once they … Read More
The post Confessions of a Day Trader: Pump up…

Each Monday, Stockhead’s resident day trader gives us a peek at the highs and lows of his trading diary and hints at what might be coming this week.

Platform used: Marketech
Round Trip: A round trip is $10 up to $25,000 and then above $25,000, commission is at 0.02% in and at 0.02% out.
Rules of engagement: Never hold any positions overnight (unless forced) and try to avoid any suspensions (if possible). No shorting.
 

Monday January 10

Mmmmm is all I can say about today. Mmmmmm!

Volumes very low. Hard to find anything, though CBA made a classic 11am move and everything else was just bland.

Both APT and FMG allowed me out with just a couple of minutes to go. The results of no profit and $12.00 profit sum up the day.

So, that’s $172 for the day and put in a bit of time and energy to produce that. Mmmmm. Off for a swim and a beer.

Image: Marketech

Recap:
Bought 500 CBA @ 102.66
Bought 600 APT @ 72.27
Sold 500 CBA @ 102.98 ($160.00 profit)
Bought 2,500 FMG @ 20.63
Sold 600 APT @ 72.29 ($12.00 profit)
Sold 2,500 FMG @ 20.63 ($0.00 profit)

Got a text off a mate and this was my reply in blue:

Bitcoin (which I don’t trade but watch) hit $39,500 that night (inflation hedge vs gold, had gold up Bitcoin down) and Friday APT traded down to $69.03.

 

Tuesday January 11

After yesterday’s effort, decide to be a bit more aggressive on size today. CBA broke down below $101.00 a few times today and gave me two opportunities.

Both times left sell limits at $100.98 because if they were going to push back above $101, they would need to take me out first, so for the sake of 2c it is a good strategy to have.

Just put sell limits below key breakout figures as sometimes they can reach that figure and fall back.

Then as I’m laying down with a nice sea breeze blowing through I noticed FMG getting sold down with not long to go. Made a 3c turn on 5000 and could have gone either way, so was a ‘heads or tails’ trade and heads came in!

Up $645 and spent a bit on brokerage but this allowed for smaller turns required to get a profit.

Image: Marketech
Image: Marketech

Recap:
Bought 1,500 CBA @ 100.98
Sold 1,500 CBA @ 101.15 ($255.00 profit)
Bought 1,500 CBA @ 100.82
Sold 1,500 CBA @ 100.98 ($240.00 profit)
Bought 5,000 FMG @ 21.04
Sold 5,000 FMG @ 21.07 ($150.00 profit)
 

Wednesday January 12

Back to finding my ‘zone’ a bit today.

Working out that volumes are not as big as they could be but there’s still some volatility going on.

For example, CBA’s day range was $102.48 to $100.82 and FMG’s was not as dramatic at $21.20 to $20.68, but both have support(ish) levels. CBA $101.00 and FMG $21.00.

Doesn’t really mean anything in the real world but in the stock market world, they get sold down and bought back up.

FMG trade went on longer than I thought and CBA again gave me two opportunities. Go to bed thinking ‘should I up the size even more or will that bring me undone?’

Sipping a nice single malt as I type and contemplate my movements for tomorrow and asking my trading ‘God’ for guidance. Up $775 for the day.

Image: Marketech
Image: Marketech

Recap:
Bought 5,000 FMG @ 20.90
Bought 1,500 CBA @ 101.57
Sold 1,500 CBA @ 101.73 ($240.00 profit)
Bought 1,500 CBA @ 100.99
Sold 1,500 CBA @ 101.18 ($285.00 profit)
Sold 5,000 FMG @ 20.95 ($250.00 profit)
 

Thursday January 13

Pre-market, the news that USA inflation was at a 40-year high got me thinking about gold.

Then out of the blue, CHN opened down and I lined up 4000 to buy and then chickened out and made my order 2000. I thought there maybe something fundamentally wrong as a reason for marking it down.

As it turned out my timing was good but my size was not. Then later on, CBA gave me another opportunity when it fell below $102.00.

Good result for not too much effort today. Plus $585.

Image: Marketech
Image: Marketech

Recap:
Bought 2,000 CHN @ 8.34
Sold 2,000 CHN @ 8.55 ($420.00 profit)
Bought 1,500 CBA @ 101.98
Sold 1,500 CBA @ 102.09 ($165.00 profit)

 

Friday January 14

Well today was the day that APT traded with a 6 in the front. Can you believe it? Amazing to think that once they were par with CBA.

Just shows that a quality dividend payer will always win in the end. Not touching APT now until they become Block on the 20th.

Got a fix on CBA and also MFG. The range on CBA was $102.65 to $100.50. WTF is all I can say and today was all about patience.

Low volume and inflation scares and a Friday and an Australian holiday mode all adding to the volatility.

Up $2635 gross and $2089 net after brokerage (CBA the main culprit). Bring on Monday!

Image: Marketech
Image: Marketech

Recap:
Bought 1,500 CBA @ 100.59
Bought 2,000 MFG @ 19.58
Sold 1,500 CBA @ 100.81 ($330.00 profit)
Sold 2,000 MFG @ 19.65 ($140.00 profit)

The post Confessions of a Day Trader: Pump up the volume, this one’s in the bank appeared first on Stockhead.


Author: Bottom Picker

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Precious Metals

Lundin Gold Sees BMO Reiterate $14 Price Target After Production Beat

On January 10th, Lundin Gold Inc. (TSX: LUG) announced its 2021 full-year production results. The company announced that it produced
The post Lundin Gold…

On January 10th, Lundin Gold Inc. (TSX: LUG) announced its 2021 full-year production results. The company announced that it produced 428,514 ounces of gold, beating their own high range of guidance, which was 420,000 ounces. The breakdown was 289,499 ounces of concentrate and 139,015 ounces of Doré. The company processed 1,415,634 tonnes this year with an average throughput of 4,121 tonnes per day and a recovery rate of 88.6%.

Lundin Gold currently has 9 analysts covering the stock with an average 12-month price target of C$13.69, or a 36% upside to the current stock price. Out of the 9 analysts, 8 have buy ratings and 1 analyst has a hold rating. The street high sits at C$15.50, or a 54% upside from Stifel-GMP. While the lowest 12-month price target is C$11.75.

In BMO Capital Markets’ note, they reiterated their C$14.00 12-month price target and Outperform rating on Lundin Gold, saying that the company had strong fourth-quarter production.

For the fourth quarter Lundin Gold produced 107,900 ounces, beating BMO’s 104,600 ounces, and they note that the companies throughput and recovery rates have been steadily increasing each quarter in 2021.

Though the full year beat was unexpected by many, BMO believes that this was expected due to the strong production at Fruta del Norte with their throughput increasing 4,200 tonnes per day. Additionally, they expect Lundin Gold to come in at their own guidance for all-in sustaining costs.

Lastly, BMO believes that Fruta del Norte has started to accumulate high-grade stockpiles, which has only started in the last quarter or two. They believe that the building “of modest stockpiles as a positive for the mining operation.”

Below you can see BMO’s updated fourth quarter, 2021, and 2022 estimates.


Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

The post Lundin Gold Sees BMO Reiterate $14 Price Target After Production Beat appeared first on the deep dive.



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Author: Justin Young

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Precious Metals

When the Fed is between a rock and a hard place, got gold?

2022.01.05
Inflation is one of the best determinants of gold price movements, because investors buy precious metals (gold, silver, platinum and palladium)…

2022.01.05

Inflation is one of the best determinants of gold price movements, because investors buy precious metals (gold, silver, platinum and palladium) as an inflation hedge when the prices of goods and services are rising faster than interest rates.

Although gold offers neither a yield (bonds, GICs) nor a dividend (stocks and mutual funds), it is considered a smart investment when inflation diminishes an investor’s principal or erodes the purchasing power of a currency.

Gold is even more popular when real interest rates, typically the yield on the US 10-year Treasury note minus the inflation rate, are below zero, like currently.

The reason for this is simple, when real interest rates are at or below 0%, cash and bonds fall out of favor because the real return is lower than inflation. If you are earning 1.6% on your money from a government bond, but inflation is running 2.7%, the real rate you are earning is negative 1.1% — an investor is actually losing purchasing power. Gold is the most proven investment to offer a return greater than inflation, by its rising price, or at least not a loss of purchasing power.

Bond market and gold market observers keep a close eye on US Treasury yields, particularly the benchmark 10-year, because it serves as a proxy for other financial products, such as mortgage rates, and it also signals investor confidence. When there is low confidence in the economy, people want safe investments, and US Treasuries are considered among the safest. Demand for Treasuries bids up their prices and yields fall. Conversely, when confidence returns, investors dump their bonds, thinking they do not need to play it safe. This causes bond prices to sink and yields to climb.

The current 10-year Treasury note yields 1.74% and the December CPI rate of inflation is 7%, making real interest rates minus 5.26% — an ideal environment for gold prices.

Spot gold on Friday climbed to $1,816/oz, at time of writing, corresponding with a lower US Dollar Index (DXY has fallen from 96.32 at the start of January to 95.17 currently) and following the release of December inflation figures.

1-month spot gold. Source: Kitco
1-month US Dollar Index DXY. Source: MarketWatch

Those hoping for a reprieve from the highest US inflation in decades, which many, wrongly imo, attribute to pandemic-related supply chain disruptions (there are in fact a number of reasons why current higher prices are likely to be with us for a long time) were disappointed.

The US Labor Department said that its Producer Price Index (PPI) rose 0.2% from November to December, bringing producer prices to a record-high 9.7%, the biggest calendar-year increase since data was first calculated in 2010, the Labor Department report said.

The same report said US consumer prices increased solidly in December, led by gains in rental accommodation and used cars, culminating in the largest annual inflation rise in 40 years. The Consumer Price Index (CPI) surged 7% in the 12 months through December, which is the biggest year on year increase since 1982.

US inflation rate (CPI)

The US Federal Reserve, whose job is to keep unemployment in check and inflation (the Federal Funds Rate) in the “Goldilocks” zone of 2%, is telegraphing three interest rate increases of 0.25% each (1% at the high end of the range) this year.

The US government produces two main inflation indices, the Consumer Price Index (CPI) and the Personal Consumption Expenditures Index (PCE), and two “core” variations that exclude certain “volatile” goods. All have risen faster and more persistently than the Fed expected.

It’s important to note, the Federal Reserve doesn’t count food and fuel in its regular inflation forecasts, preferring the “PCE inflation” metric. As the name suggests, the Personal Consumption Expenditures price index measures changes in the prices of consumer goods and services. Thus the Fed is deliberately understating the real inflation rate, how they can exclude food and gas prices is beyond comprehension, we all eat, and we all use transportation.

The problem with the Fed’s game plan of a 1% increase in each of the next two years, is it is too dovish for what is required. 

Arguably, rate adjustments of 2% will have little to no effect on skyrocketing inflation.

Yet herein lies the dilemma — anything beyond that could have a very negative impact on the US economy, because each interest rate rise means the federal government must spend more on interest, reflected in the annual budget deficit, which keeps getting added to the national debt, currently at $29 trillion and climbing.

A 0.75% interest rate hike would increase the interest costs per household by $1,400. That will hit the consumer right in the pocketbook, as will higher mortgage rates, car loans and credit cards, which will all go up following the rise in the Federal Funds Rate.

Corporations will also feel the squeeze. The interest on their loans will increase, forcing them to hike prices. Again the consumer pays. In the worst cases, companies will lay off staff, hurting workers and pushing the most vulnerable into severe economic hardship.

The US has borrowed about $6 trillion over the past 2.5 years to fight covid, placing a heavy burden on its finances.

The Congressional Budget Office (CBO) estimates that interest costs were $331 billion in 2021. 

According to the Committee for a Responsible Federal Budget, each 1% rise in rates would increase interest costs by roughly $225 billion at today’s, end of 2021, debt levels.

We know that the Fed is planning a 1% rate increase this year. We also know that the federal deficit hit $2.8 trillion in 2021, the highest ever, except for 2020, an outlier due to massive coronavirus pandemic spending. For easy math, let’s call it $3T.

2022’s interest costs are calculated as follows: $331B (from 2021) + $225B (+1% rate hike) = $556B. This is without the debt increasing, but we know it’s going to increase, by at least $3T (2021 budget deficit).

The Fed is planning another 1% rate increase in 2023. 2023’s interest costs are calculated as follows:

$556B (from 2022) + $225B (+1% rate hike) = $771B. This is the interest payment due at the end of 2023. But again, this is without any new debt. Let’s add it.

The Congressional Budget Office (CBO) and the Committee for a Responsible Federal Budget (CRFB) — both reliable sources — project a deficit of $1.3T in 2022, and every year until 2031. This is the amount per year that will be added to the national debt, currently sitting at $29T.

Here are the total interest costs in 2023: 

If we take the $29T debt and add $3T (2021 deficit) + $2.6T (deficits to end of 2023) = $34.6T, we are increasing the debt by ~20%. 20% of $781B is $156B. $781B + $156B = $937B. So at the end of 2023, interest payments will be almost $1T.

This to me is a very conservative figure. It doesn’t include Biden’s trillion-dollar infrastructure spending package that has been passed, nor additional covid-19 relief measures which are probable, with no sign of the pandemic letting up, two years in.  

Inflation plays a big role here. Consider: even if the supply chain issues get ironed out (a big “if” given that covid appears to have taken on new life as the omicron variant), and that takes care of half the current 7% rate of inflation, there will still be another 3-4% inflation (food, energy transition, wage spiral, and climate crisis) left to deal with.

Let’s suppose the Fed wants to get serious about fighting inflation. Does it really think it can raise rates by a factor of 4, to match 4% inflation?

In 2023, interest costs could amount to $937 billion.

But that only brings rates up to 2%. Doubling the Federal Funds Rate to 4% would mean interest costs of nearly $2 trillion. Where is the government going to find the money?

There are only three choices: issue bonds, raise taxes, or print money. Higher taxes hit the poor and the middle class hardest, and in the United States, 70% of the economy is consumer spending. US household debt is reportedly on the rise, with families across the country more than $15 trillion in the red, according to personal finance app Nerd Wallet, via Twitter. The average household owes a whopping $155,622. 

Next let’s consider the possibility of issuing more bonds. In a previous article we identified the trend of foreign buyers slowing their US Treasury purchases. Instead of foreigners buying T-bills, it is increasingly Americans, including consumers, banks and the biggest buyer of them all, the US Federal Reserve. From 2008, when the Fed balance sheet was ‘just’ $1 trillion, four rounds of quantitative easing, where the Fed engaged in monthly asset purchases of government bonds and mortgage-backed securities, to stimulate the economy, has raised the balance sheet to over $8 trillion. Since the fourth round of QE started in the spring of 2020, the Fed’s total assets have more than doubled.

Fed balance sheet. Source: US Federal Reserve

Again the inflation problem is paramount. The incentive for buying a US Treasury bill or bond is gone, the buyer’s purchasing power eroded by inflation. Wolf Street gives us a good explanation.

The current Federal Funds Rate is .08%, but CPI inflation is 7%, giving a real (after inflation) Effective Federal Funds Rate (EFFR) of -6.94%. This is the most negative EFFR since 1954. The real interest rate on savings accounts and Certificate of Deposit (CD) accounts, and the real yield on short-term Treasuries, is similarly -7%. The 10-year yield, which pays better interest, is -5.3% in real terms.

Even junk bonds, considered highly risky compared to Treasuries, have real yields below 0%. As Wolf Richter points out, You have to go to CCC-rated junk bonds – “substantial risk” of default – to get a yield above the rate of CPI inflation. 

It really does beg the question, when foreign countries, individuals and corporations stop buying Treasuries, and Americans finally realize they are losing their T-bill purchasing power to inflation, who is going to buy US debt?

That leaves only one option available to the US government, and that is printing money — which of course, is inflationary — especially if the printing is “helicopter” style as in direct stimulus payments to consumers, which is responsible for a good percentage of the current CPI increase.

The Fed (and the Treasury) is between a rock and a hard place, the Fed can’t raise rates to combat high inflation because doing so will wreck the economy, and imo, the Treasury will soon struggle to find enough buyers for US government bonds because the yields are so low, in all cases negative.

Historically, the way the Fed has handled economic crises is to lower interest rates. We see this in the chart below by Real Investment Advice.

Source: Real Investment Advice

The 10-year rate started out at 4% in 1965 and hit a 57-year peak of >14% during the 1982 Latin American debt crisis. Almost every crisis, including the 2000 dot-com crash, the 2007 sub-prime mortgage debacle, and covid-19, has been followed by an interest rate cut.

Conclusion

In two years time will we look at this chart and see the black line rising, reflecting higher interest rates powering the US economy out of the covid-19 recession? Seems unlikely.

With 7% US inflation climbing faster and it being “stickier” than anticipated, the Fed has few policy options at its disposal. The horrendous yields on US Treasuries make them a poor investment, something foreign investors have already realized and US bond-buyers will surely cotton onto soon as well.

This practically guarantees the continuation of Fed bond buying (QE) despite the much-ballyhooed taper. As for raising rates, we have just proven that the Fed can’t do it, at least not at the levels required to beat 4% inflation, which may be charitable. We are talking about interest costs nearing a trillion dollars per year, when the deficit is accounted for. 

In a recent article, Peter Schiff maintains that the government is using cooked CPI data that understates inflation. If it was using the formula it used in 1982, inflation would be higher in 2021 than it was then, he writes, just over 15%.

The fact is nobody is going to want to buy US debt at 7% inflation, let alone 15%. The Fed will continue to print money, buy bonds and keep interest rates below 1% for as long as it can — probably hoping that inflation will magically melt away — all of which is extremely positive for gold.

Rising geopolitical tensions continue to add to gold’s allure. There are a number of hot spots in the world today that could easily flare up into a conflagration that escalates into a shooting war or even the nightmare scenario of missiles being launched.

They include the ongoing threat of war between North and South Korea that would draw in the United States; tensions between the US, China and its neighbors over Taiwan; and a migrant crisis in Belarus that Ukrainian officials believe is a ruse invented by Russia to stage an invasion of Ukraine, similar to what happened in 2014 when Russian forces annexed Crimea.

There are 100,000 Russian troops on Ukraine’s border and on Friday photos were released showing its forces on the move. An alleged Russian cyberattack hit around 70 internet sites including the security and defense council, Reuters reported. Talks between Moscow and Western allies ended Thursday with no breakthrough.

When market participants see Fed rate increases as the hollow threats they are, amid rising and currency-debasing inflation, we expect many will see the light and return to gold.

Richard (Rick) Mills
aheadoftheherd.com
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