UBS Describes What Has Them So Excited About Gold Miners

Gold & Silver Market Rundown - February 23, 2024

Key Concepts:

• Structural Bull Cycle (Gold Miners): A sustained period of rising prices and positive fundamentals for gold mining companies.
• Cartel Fragmentation (Mexico): The breakdown of organized crime groups in Mexico, leading to increased violence and disruption of supply chains.
• Extortion Economics: The practice of criminal organizations demanding payments for protection or to allow business operations.
• Comex Shutdown/Delivery Problems: Temporary halts in trading on the COMEX (Commodity Exchange) due to issues with fulfilling physical delivery requests for silver.
• PPI (Producer Price Index): An economic indicator measuring the average change over time in the selling prices received by domestic producers for their output.
• GLD/SLV: Exchange Traded Funds (ETFs) tracking the price of gold (GLD) and silver (SLV) respectively.
• Open Interest: The total number of outstanding derivative contracts, often used as an indicator of market participation.

I. Market Overview & Precious Metals Performance

As of February 23, 2024, market indicators showed: 10-year yields at 3.98 (down 2.5), the dollar at 97.72 (down almost 6), the S&P 500 at 4880 (down 11), the Nasdaq at 14935 (down 19), and the VIX at 14.43 (up 1.43). Gold was trading at $2,051.86 (up $5.78 - $5.80), while silver demonstrated stronger performance. Vince Lansancy noted that gold buyers were becoming less patient with the weaker dollar, anticipating increased buying pressure, particularly with the release of the PPI data. Silver showed strength overnight, recovering from an initial dip, and was trading within a range of $70-$94.

II. Silver Supply Chain Disruption in Mexico

A significant concern highlighted was the escalating security risk to silver mining operations in Mexico. The fragmentation of cartels in regions like Zacatecas, Durango, and Sinaloa is leading to increased kidnappings (10 reported in late January), extortion, and transport blockades. This is disrupting supply chains and raising costs for mining companies. New US terror designations further complicate the legal landscape for companies operating in cartel-controlled areas. The situation is described as a “high-stake security fault line” threatening a critical metal supply chain.

III. UBS Bullish Outlook for Gold Miners

UBS analysts presented a three-pillar case for a continued bull run for gold miners through 2026, anticipating gold prices to reach $5,900. These pillars are:

1. Sustained Gold Demand: Driven by central bank buying, ETF inflows, and easing real interest rates.
2. Improved Corporate Fundamentals: Miners are generating stronger cash flow, reducing debt, and demonstrating capital discipline.
3. Contained Production Costs: Input costs, particularly energy, are remaining stable, leading to expanding margins.

The key risk identified by UBS is a sustained pullback in gold prices. JP Morgan’s report suggests that as long as gold remains above $4,500, their bullish thesis holds, implicitly establishing a similar lower bound for UBS’s outlook.

IV. COMEX Silver Delivery Issues & Market Manipulation

Lansancy discussed a recent shutdown of the COMEX for silver delivery, attributing it to delivery problems and a need to defer deliveries for those requesting physical metal. He drew a parallel to a previous COMEX shutdown during a cooling problem, after which silver prices spiked over 100%. While he doesn’t anticipate a similar 100% rally this time, he questioned the validity of his previously established $70-$94 silver trading range, suggesting it may be less reliable. He noted that COMEX shutdowns are not intended to crush prices, but to allow the market to “catch its breath” and manage delivery requests. He also observed a shift in trading activity, with investors increasingly favoring GLD and SLV (physical-backed ETFs) over gold futures, suggesting a loss of confidence in the futures market due to delivery concerns.

V. Commodity & Market Movements

• WTI Crude Oil: Up $1.40, reflecting a reluctance among traders to short commodities over the weekend.
• Copper: Up almost 10 cents to $4.03.
• Natural Gas: Up 3 cents.
• Platinum: Up $96 to $2376.
• Palladium: Up $26 to $1812.
• Grains: All up, with wheat up 1.15% and corn up almost 2%.

VI. Fortuna Mining’s Strong Performance

Fortuna Mining reported record quarterly and annual free cash flow of $132.3 million and $330 million respectively, driven by strong operational performance and record high gold prices. Jorge Bardón, CEO of Fortuna, stated that the average realized gold price for the fourth quarter was 20% higher than the previous quarter and 57% higher than the same period in 2023, leading to significant margin expansion. He highlighted the company’s ability to capture the full value of the higher gold prices. The Demba Super Gold project is nearing a construction decision.

VII. PPI Data & Market Expectations

The upcoming PPI data release is expected to significantly influence market direction. A benign PPI reading could trigger buying in metals, while a hot reading could lead to a sell-off as it might suggest the Federal Reserve will delay easing monetary policy. The most significant market movements are anticipated after European markets close.

VIII. Technical Analysis & Trading Strategies

Lansancy presented technical analysis for both silver and gold. For silver, he highlighted the $70-$94 range, but expressed uncertainty about its continued validity. He suggested a long position with a bias towards taking profits around $94, anticipating a potential breakout above that level. For gold, he observed a shift in the trend, indicating increased buying urgency. He noted that the futures market is losing validity due to delivery delays, and investors are shifting towards physical-backed ETFs.

Conclusion:

The market outlook is cautiously optimistic for gold miners, supported by strong gold demand, improved fundamentals, and contained costs. However, the primary risk remains a significant pullback in gold prices. The silver market faces unique challenges due to security concerns in Mexico and potential manipulation within the COMEX delivery system. The upcoming PPI data will be a key catalyst for market movements, and traders should be prepared for volatility. Fortuna Mining’s strong performance exemplifies the benefits of operating in a high-gold-price environment.