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BC’s Golden Triangle: Perhaps the World’s Greatest Area Play – These Are Some Players to Watch

By Rod Blake Investment knowledge comes from the accumulation many inexact criteria or factors. The…

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This article was originally published by Resource World

By Rod Blake

Investment knowledge comes from the accumulation many inexact criteria or factors. The net result of this knowledge enables the investor to decide whether to buy, avoid or exit a particular investment or sector. Sometimes investment knowledge becomes profitable quite quickly such as those who foresaw the future electrification of the auto industry and invested in an upstart new auto company  – Tesla Inc. ‘TSLA’. Sometimes this knowledge can be expensively painful if one invests in a rising market that is about to turn – think of those who followed and thought the American housing market was a solid investment that could only go up and purchased Mortgage Backed Securities prior to housing collapse in 2008. Most often though – investment knowledge comes from watching the success or failure  of companies or sectors over time and various economic cycles.

Resource exploration and investment is much the same. Sometimes, but rarely, an orebody is discovered with the first few drill holes. I was lucky enough to be involved with such a discovery with the Afton copper discovery near Kamloops, BC in the early 1970s.. Sometimes an investment is too good to be true such as the Bre-X gold debacle of the mid 1990s. But for the most part, orebodies and by extension, mining companies are built over years of trial & error and economic cycles. As noted above – investment knowledge is enhanced with time. One of the benefits to being a broker for over three decades was the ability to identify and deal with various economic  and mineral cycles. And as a broker who focused a good portion of his time on resource investments, I got to see firsthand how mineral companies or sectors performed during these cycles. I feel The Golden Triangle in Northwest British Columbia fits this enhanced investment criteria.

The Golden Triangle is in a very unique mineral occurrence. It is not a one or two drill hole discovery wonder. It is certainly not the result of a new or suddenly in vogue market niche.

The Golden Triangle is a relatively complex mineral camp that has been worked by many miners since the turn of the last century. The main minerals in the camp, gold, silver and copper, are well known and have been mined for centuries. The uniqueness of the camp comes from the number of orebodies within the triangle and the  relatively high grade of those orebodies. A comparison to the Golden Triangle might be the high grade nickel mines in Sudbury, Ontario or the many gold mines near Val-d’Or, Quebec.

The historical longevity of the Triangle has also been a benefit to companies involved due the wealth of geologic and mineral knowledge accumulated over time. One of the unique characteristics of the mining industry is that companies have to file ongoing reports of their exploration and production activities. These reports are recorded and kept on file by governments and are made available as historic building blocks to enhance current activity. That is – a geologist in 2021 can reference field reports from many years ago to better position the drill for this season’s program.  Most orebodies are discovered this way, with each successive company building on the knowledge of preceding explorers who held and then dropped the property due to less than expected results or failing to raise funds in a bear market. Case in point – just prior to the Afton discovery, Kennecott Mining had dropped the property due to poor drilling results. As it turned out their exploration program missed the edge of the orebody by only a few hundred feet. Many of the orebodies in the Triangle are the result of the same scenario. That is – multiply companies exploring and advancing promising geologic occurrences only to drop the property due to less than expected results or a poor economic or mineral cycle. Then, when mineral prices and economics improve, another company acquires the same ground and begins their exploration journey with benefit of the accumulated recorded data of previous explorers.

My exposure to the Golden Triangle began as a young broker in the mid to late 1980s. The area wasn’t as well defined as it is today and was mainly referred to as the Eskay Creek or Iskut Area. Back then there were two dominate players in the area –  noted mining man Don McLeod with his Newhawk Gold’s Sulphurets Property Brucejack Project and famous promoter/financier Murray Pezim and his Calpine Resources’ Eskay Creek Project,

Brucejack was a very highgrade but erratic deposit. The very high grade globular or nugget like nature of the gold required a major underground development via a very expensive declining ramp to recover bulk samples and to keep the drill bits as close to the ore as possible. And while the orebody was well defined, the project needed higher gold prices to warrant a production decision and lay dormant until only a few years ago as the flagship mine of Pretium Resources ‘PVG-T’.

As of yesterday, Newcrest Mining Limited [NCM-ASX, TSX] announced it intends to acquire all of the outstanding shares of Pretium for C$18.50 per share, a premium of 23%.

The ore at Eskay Creek was  also very illusive and explored with numerous drill holes. Many thought that Calpine should drop the property and move on, but Mr. Pezim persisted and inevitably the now-famous hole 109 returned a 682-ft. interval grading an average of 0.87 oz. gold, 0.97 oz. silver, 1.12% lead and 2.26% zinc. The Eskay Creek Mine was ultimately bought and put into production by Barrick Gold and was North America’s highest grade gold producer between 1994 and 2008. This mine produced over 3 million ounces of gold and nearly 160 million ounces of silver from 2.2 million tonnes of ore.

Due to limited access, the Triangle was much more of a seasonal play in those days. Remember, this was pre-internet and brokers and investors waited anxiously for the season’s drilling results to be reported. In the process, Calpine’s spectacular #109 drill hole triggered a trading frenzy on the Vancouver Stock Exchange which brought many more companies into the fray. We had regional maps of the area on our walls and would mark off the geological and structural trends of the various companies or properties of interest as assays came in. Many other mineral occurrences were discovered but few were developed and the area play wound down as financings became difficult as mineral prices declined into the late 1990s.

The area became known as The Golden Triangle early this century as mineral prices again improved and interest in the area renewed once again. This time though – the knowledge gained from the collage of various many regional reports produced a much larger and district area of mineral interest. And just as the miners on the 1980s learned from their predecessors, the miners of today have learned from theirs. Except, there are many differences this time around. Thanks to the information age, today’s explorers have an extraordinary wealth of data to review and research in order to plan their exploration programs. Modern geologic and geophysical technology helps today’s miners to better focus in on their targets. And thanks to global warming and improved infrastructure, companies have greatly extended their exploration seasons to the point where the larger well funded projects can now work 12-months of the year.

Today’s investors also have a distinct advantage than we had back in the day. Today’s  investors can also research companies and projects via the internet, podcasts and trade shows. Instead of anxiously tracking projects through maps on a wall they can follow projects very closely on their computer.

Resource brokers and seasoned resource investors know that minerals in the ground don’t disappear. They go in and out of favour based on economic, environmental or regulatory decisions. Today, mineral prices are rising and exploration companies are coming back in vogue. For a shrewd investor, an area play in is a great way to participate in this trend. Instead of investing in one company and hoping for a long shot discovery, an area play, much like an Exchange Traded Fund or ETF,  gives investors many more chances of success as companies in the area trade off each other’s successes.

The Golden Triangle is a very unique area play that differentiates itself from many others. It is in one of few mineral friendly regions of the world with good and improving infrastructure. It has a storied history of great discoveries and wealth. It’s orebodies are some of the richest in the world and as a result have attracted a broad range of companies and investors. The projects are concentrated in a relatively small area in interest so that the results of one can influence others nearby. There are a variety minerals  such as gold, silver, copper and others in play. Over the years, I have followed and invested in many area plays. And from my perspective – I would suggest that because of the history, concentration, grade and variety of its mineral occurrences – The Golden Triangle of British Columbia is perhaps  the world’s greatest area play.

Of the dozens of resource companies exploring the Golden Triable, here are a few notable stocks to watch:

American Creek Resources Ltd. [AMK-TSXV] is a Canadian exploration company with a front-row seat in one of the hottest gold exploration projects in northwestern British Columbia’s Golden Triangle area.

The company’s key asset is a 20% interest in the Treaty Creek joint venture project located in the same hydrothermal system as Seabridge Gold Inc.’s [SEA-TSX, SA-NYSE] KSM property and Pretium Resources Inc.’s [PVG-TSX] Brucejack gold mine.

KSM is one of the world’s largest undeveloped gold projects as measured by reserves, containing 38.8 million ounces of gold and 10.2 billion pounds of copper in proven and probable reserves.

Exploration at Treaty Creek is led by Ken Konkin, Vice-President corporate development and exploration at Tudor Gold Corp. [TUD-TSXV, TUC-Frankfurt], which holds a 60% interest in Treaty Creek and is the project operator. The other 20% is held by Teuton Resources Corp. [TUO-TSXV].

Konkin is best known for his instrumental role in the discovery of Pretium Resources “Valley of Kings” deposit and taking the Brucejack mine into production in 2017. Brucejack is expected to produce between 325,000 and 365,000 ounces of gold this year.

If Konkin can repeat his earlier success in the Golden Triangle, it would put American Creek and its joint venture partners in a very favourable position. American Creeks 20% interest is fully carried until a production notice is given.

This view is obviously shared by key investors, including Bay Street financier Eric Sprott, who continues to fund the drilling effort, including a placement last month and currently holds a significant position in all three companies, including a 17.8% partially diluted stake in American Creek.

American Creek offers investors a low-cost entry to the Treaty Creek story as its share of the M&I resource is currently being valued close to $19/oz gold equivalent. In comparison, the operators’ share is valued close to $32/oz gold equivalent for the same ounces in the ground.  As noted above, American Creek will incur no development costs (dilution) for Treaty Creek, and the project may be sold prior to a notice of production is given.

The largest gold and copper deposits in the Golden Triangle are hosted by the Sulphurets Hydrothermal System and include the KSM and Brucejack deposits, which are located in the southern half of the geological system.

The 17,913- hectare Treaty Creek property covers the northern half of the system, where geology, geophysics, and exploration results show that the known mineralization in the southern half continues north.

That would be in line with the thinking of Konkin, who has referred to deposits in the Sulphurets Hydrothermal System as a “string of pearls….just really big pearls.”

Exploration of the Treaty Creek area over the past 30 years by various junior companies resulted in the discovery of a number of surface mineral showings, some with very high gold and silver values.

However, it is only recently that drilling revealed the potential for a large-scale porphyry-style gold deposit at the Copper Belle and Goldstorm zones, which are located on-trend and just five kilometres northeast of the KSM deposits.

A resource calculation announced in March 2021 for the Goldstorm zone contained *19.4 million ounces of 0.74 g/t gold equivalent (AuEq) in the Measured & Indicated resource category as well as 7.9 million ounces of 0.79 g/t AuEq of inferred resources and open in all directions.

In a September 28, 2021 news release, Tudor Gold said the latest set of results from the 2021 resource expansion and definition drill program indicate that the Goldstorm system is expanding to the northeast.

Optimism is driven by results from four drill holes, including step-out hole GS-21-119, which returned 196.5 metres of 1.76 g/t gold equivalent (AuEq) within a broader zone of 564.0 metres containing 1.09 g/t AuEq, along with previously announced hole GS-21-113 which intersected 927m of 1.265 g/t gold equivalent.

However, Goldstorm is only one of several potential deposits on the Treaty Creek project.

In the same press release, the company said near-surface mineralization was encountered at the Eureka Zone, which is located approximately 1,000 metres southeast of the Goldstorm Deposit.

Drilling at Eureka returned 67.5 metres of 1.13 g/t AuEq within 217.5 metres averaging 0.76 g/t AuEq. Like Eureka, Goldstorm remains open in all directions and at depth as drilling continues.

Tudor Gold has postponed drilling on the Perfectstorm zone, located just two kilometres southwest of Goldstorm, enabling them to concentrate their efforts on Goldstorm given the grades are getting richer to the north.  It appears that 2021 drilling will expand the resource extensively.

The hope is that the higher-grade material in the first 300-400 metres from surface in the 300 horizon could help to improve the economics of Goldstorm by reducing the Cap-X payback period of an open pit operation.

American Creek’s other key asset is the Austruck-Bonanza in central British Columbia. The property is contiguous to WestKam Gold Corp.’s [WKG-TSXV] Bonapart gold property, where two open pits yielded a 3,700-tonne bulk sample grading 26.5 g/t gold.

* Metal prices used were US$1,625/oz Au, US$19/oz Ag, US$2.80/lb Cu with process recoveries of 88% Au, 30% Ag and 80% Cu. A C$16.50/tonne process and C$2 G&A cost were used. Approximately 90% of the AuEq is gold.

Benchmark Metals Inc. [BNCH-TSXV, CYRTF-OTCQB, 87CA-FSE] is working to unleash the potential of its 100%-owned Lawyer’s gold silver project located in the prolific Golden Horseshoe region of northern British Columbia. The project continues to be on track for a 2022 feasibility study and potential construction readiness in 2024, the company has said.

Benchmark is part of the Metals Group of companies, which is managed by an award-winning group of professionals with a proven ability to capitalize on investment opportunities and deliver shareholder returns. Bay Street financier Eric Sprott remains the company’s largest single shareholder with a 14.8% of Benchmark’s outstanding common shares.

Its flagship Lawyers property is located in the Toodogone region of the Omineca Mining Division of B.C. and consists of 37 contiguous mineral claims. The claims cover 114 square kilometres of land that encompass the Lawyers group of prospects, including the former Lawyers underground gold-silver mine and the Silver Pond group of prospects, and includes over 16 gold-silver mineral occurrences.

The property is situated 45 kilometres northwest of Centerra Gold Inc.’s [CG-TSX, CAGDF-OTC] Kemess Copper-Gold mine, where underground development and construction is under way.

Exploration in the area began in the late 1960s and peaked in the 1980s, identifying numerous showings, prospects and deposits culminating in the development of the Lawyers gold-silver mine. It operated between 1989 and 1992, producing 171,200 ounces of gold and 3.6 million ounces of silver.

However, the deposit was never fully mined, and the surrounding area was never thoroughly explored for gold-silver mineralization.  An estimated $50 million in infrastructure remains in place, including year-round road access.

Five underground developments also remain in place, in addition to historical resources and new targets. Benchmark is now working to establish a world class gold-silver mine at the site.

In a May 14, 2021 press release, Benchmark announced a bulk-tonnage mineral resource estimate for the project. The estimate includes 2.1 million ounces grading 1.62 g/t gold equivalent (AuEq) in the indicated category. On top of that is an inferred resource of 821,000 ounces, grading 1.58 g/t AuEq.  The resource is amenable to both open pit and underground mining methods.

The mineral resource estimate will form the basis of a preliminary economic assessment (PEA) that is expected to be completed later this year.

“This initial multi-million-ounce mineral resource has exceeded all expectations and has significant expansion potential with the planned 2021 drill program,” said Benchmark CEO John Williamson.” In addition, the regional exploration drill program will be targeting zones for new satellite deposits.”

The company has said it planned to complete a fully funded drill program, at a cost of up to $30 million this year, to move the project towards the feasibility study stage. That includes drilling on six targets including the Marot zone, which yielded 101.00 metres core length of 0.82 g/t gold equivalent in drill hole 20MLDD005.

Of the 100,000 metres of drilling planned for this year, 50,000 metres will be for mineral resource definition drilling to both expand current mineral resources and to upgrade the current inferred mineral resources to measured and indicated classifications for inclusion in an anticipated feasibility study in 2022.

In addition, to expanding the mineral resource zones at depth and along strike, a regional exploration program will consist of 50,000 metres to drill test and expand existing and new discovery targets, including Marmot, Marmot East, Lala, Silver Pond, Guildfords Edge.

An initial series of drill holes on the Connector Zone have successfully delineated near-surface continuity of gold and silver mineralization between the Cliff Creek Deposit and Dukes Ridge Deposit.

The company said the discovery of new broad mineralization and high-grade material at surface has the potential to increase gold-silver ounces in an updated mineral resource estimate and provide the potential for a higher-grade starter pit in near-term engineering studies.

In a September 28, 2021 press release, the company said all of the 10.47 million share purchase warrants that were due to expire on September 23, 27 and October 7, 2021, have been fully exercised, providing $13 million of working capital to the treasury, including financier Eric Sprott’s exercise of 6.7 million warrants that generated proceeds of $2.7 million.

On October 25, 2021, Benchmark shares were trading at $1.10 in a 52-week range of $1.64 and 83 cents, leaving the company with a market cap of $176 million, based on 187 million shares outstanding.

Thesis Gold Inc. [TAU-TSXV] is a mineral exploration company focused on proving and developing the resource potential of its Ranch Gold Project in the highly prolific Golden Horseshoe area of British Columbia.

When the company recently raised $18.4 million from an over-subscribed offering of flow-through and non-flow-through shares, Thesis CEO Ewan Webster said he expects 2021 to be a transformational year for the company.

Webster is an exploration geologist who has worked for a number of public companies in North and South America. His PhD research focused on unraveling aspects of the structure, stratigraphy, tectonics and metamorphism of southeastern B.C.

Webster leads a management team that holds a 25% stake in Thesis. On October 27, the shares traded at $1.39 in a 52-week range of $1.75 and 52 cents, leaving the company with a market cap of $63 million, based on 45.4 million shares outstanding.

Thesis offers investors a window on the Golden Horseshoe, one of Canada’s most prolific areas for mineral exploration, and home to fabled British Columbia mining operations including Red Chris, Kemess, Red Mountain and Bruce Jack. Its flagship Ranch property is also close to high profile exploration projects, including the Lawyers property where Benchmark Metals Inc. [BNCH-TSXV, CYRTF-OTCQB, 87CA-FSE] has so far outlined 3.0 million gold-silver ounces in the indicated and inferred category.

Thesis has set an exploration target of 2.0 million ounces at the Ranch project, which contains 21 known near-surface epithermal gold deposits and prospects.

The property covers 17,832 hectares and is located in the Toodoggone district about 300 kilometres north of the town of Smithers. It straddles a key stratigraphic horizon between rocks of the Upper Triassic Stuhini Group and Lower Jurassic Toodoggone Formation.

It is worth noting that property was explored in the 1980s when three small pits were excavated, producing about 41,000 tonnes of high-grade ore from the Bonanza, Thesis 111 and BV zones.

However, the property remains largely unexplored and the geological setting, coupled with historical evidence of high-grade mineralization represents a significant opportunity for a major discovery.

In an August 3, 2021 press release, the company said it had launched a fully funded and comprehensive exploration and drill program, consisting of 20,000 metres of drilling, extensive surface geochemical sampling, bedrock and alteration mapping, airborne VTEM and ground-based magnetics and induced polarization (IP) geophysics, designed to target near-surface high grade gold and silver mineralization in addition to deeper porphyry targets.

The goal is to test known zones of mineralization as well as a number of new targets which have never been drilled and have the potential for significant new discoveries. “The planned work represents a significant and extensive regional exploration program and we look forward to communicating our progress to the market over the coming months,’’ Webster said.

The August announcement came after the Government of British Columbia granted to Thesis a five-year work permit for exploration and drilling on the property.

On October 5, 2021, the company released initial results from the 20,000-metre drill program. It said strongly altered zones from the first three holes at the Bonanza Zone were selected for rushed analysis. These first three confirmation holes at the Bonanza Zone confirm high-grade gold mineralization extends from surface to depth,” Webster said. “We anticipate further results from both the Bonanza and Ridge Zones over the coming weeks,’’ he said.

Drilling highlights include hole 21BNZDD001, which returned 34 metres (core length) of 19.56 g/t gold at the Bonanza Zone, including 15 metres of 41.64 g/t gold and 7.00 metres of 82.48 g/t gold from a depth of only 26 metres down hole.

At the time that the initial results were released, the company said it has completed over 6,000 metres of the 20,000-metre program at the Bonanza and Ridge gold zones. It said two drill rigs were turning at Bonanza, but would shortly be moving to the Thesis 2&3 gold zones to complete a similar confirmation and expansion program.

It said a third drill rig (a track mounted reverse circulation drill rig) has been added and is testing over 10 new exploration targets at the heart of the project.

Thesis recently signed an early-stage exploration agreement with the Kwadacha, Takla and Tsay Keh Dene First Nations. It said the agreement provides a framework to create a collaborative working environment based on open dialogue and transparent communications.

“Even though the relationship is at an early stage, we are encouraged by Thesis Gold’s willingness to work with the Tsay Key Nay to advance our mutual interests,’’ said Chief Pierre of the Tsay Keh Dene.

tsx tsxv nyse otc otcqb asx tsx-ncm newcrest-mining-limited newcrest mining limited

Author: Resource World

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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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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Precious Metals

Gold Performance in Coming Rate Hike Cycle

  History shows that whatever the ongoing regime is (be it inflation, disinflation, or accelerating inflation), Gold usually bottoms around the start…


 

History shows that whatever the ongoing regime is (be it inflation, disinflation, or accelerating inflation), Gold usually bottoms around the start of a Fed rate hike cycle.

 

Considering the five most significant bottoms in the last 50 years (1971, 1976, 1985, 1999, 2016), we find that all but one coincided with the start of a new rate hike cycle.

 

Historically, Gold has tended to perform well (in varying degrees) amid rising short-term rates. However, unlike in the 1970s and 1980s, most recently, the start of rate cuts was a huge catalyst for Gold.

 

How Gold performs after the initial rally will depend on the type of regime that transpires.

 

In the chart below, I plot Gold’s performance following the start of the last three rate hike cycles. Average 2 presumes the beginning of the 2015-2018 cycle was December 2016, rather than December 2015.

 

In most scenarios, the first 12 months entails a rebound and then a correction. Gold will continue to rise if there is accelerating inflation (like in the 1970s) or rising inflation expectations (like in 2005). However, if neither transpires and the Fed can continue hiking, Gold will not begin the next leg higher until the Fed executes its final hike.

 

If we get more fiscal stimulus, that could put Gold on the 1970s or mid-2000s path in which Gold would rise for the duration of the rate hike cycle.

 

The market assumes no fiscal stimulus and is pricing in the Fed, stopping around 1.50% in 2023. If they had to stop sooner, pause their hikes or stop altogether, it obviously would be more bullish for Gold.

 

In any case, the immediate outlook is clear. While there is a risk Gold could decline, it would set up for a major bottom in March or April, when the Fed executes the first rate hike.

 

With that being said, you have to put yourself in a position to take advantage, and you have to make sure you buy the right companies. I suspect that March and April will be the time to buy future 5 and 10 baggers.

I continue to be laser-focused on finding quality juniors with at least 5 to 7 bagger potential over the next few years. To learn the stocks we own and intend to buy, with at least 5x upside potential after this correction, consider learning more about our premium service.



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