Gold Sits Near The Recent Low – Is Franco-Nevada A Buy At This Level? – Seeking Alpha

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Gold has been facing lots of adversity lately. On Friday, March 1, the price of the yellow metal dropped like a stone and took out the $1300 per ounce level. Last week, gold moved lower reaching a low that was 70 below its previous bottom for 2019 as the price of April futures fell to $1280.80 per ounce on March 7. On Thursday, March 6, the ECB sent the markets a particularly dovish message, sending the euro currency lower and the dollar higher which was another bearish noose around gold’s neck as it supported the dollar index which is now trading above the 97 level on the March futures contract again.

While gold recovered to the $1300 level at the end of last week and was trading above $1297 on Tuesday, March 12, it remains closer to its most recent low than the high on February 20 at just below the $1350 level. However, there are more than a few reasons to be bullish on the prospects for the precious metal in 2019. Gold has been posting gains in all of the leading currencies, and since mid-August, it has made higher lows and higher highs in dollar terms.

Buying the current dip in the gold market could offer rewards in the coming weeks and months. Gold mining stocks tend to offer leveraged exposure to the price of the metal. I have been looking at Franco-Nevada Corp. (FNV) as a candidate for my portfolio as the price of gold is sitting near its most recent low. FNV is a royalty company which means it invests in mining projects in return for a stream of royalty payments. The company’s profile states:

Franco-Nevada Corporation operates as a gold-focused royalty and stream company in the United States, Canada, Mexico, Peru, Chile, Australia, and Africa. The company also holds interests in silver, platinum group metals, oil and gas, and other resource assets. As of December 31, 2017, it had a portfolio of 341 assets. The company was incorporated in 2007 and is headquartered in Toronto, Canada.

As a royalty company, a higher price for gold will increase FBV’s payment stream, and the price of its shares will rise. Therefore, the company has diverse exposure to the gold mining industry and the price of the yellow metal.

Gold had a rough time since February 20

Gold reached its most recent peak at $1349.80 per ounce on February 20 which was $15.60 below the 2018 high at the double-top formation at $1365.40. At the same time, it rose to a level that was just $27.70 below its line in the sand on the upside at the July 2016 post-Brexit peak at $1377.50, which is the critical technical resistance level for the gold futures market.

Source: CQG

As the daily chart highlights, the price of gold futures dropped by $69 or 5.1% from the February 20 high. Gold appeared to have found at least a temporary bottom at the March 7 low at $1280.80 and was trading at around the $1297 level on Tuesday, March 12. Late last week, the price of gold briefly probed above the $1300 level before falling back towards $1290 on Monday. The daily chart shows that the price action sent technical metrics that reflect price momentum and relative strength into oversold territory. At the same time, after reaching a low at just over the $1280 level, buying appears to have returned to the gold market as the open interest metric rose from under 480,000 to just shy of 519,000 contracts. The metric is now at a higher level than where it stood when gold was on the most recent high on February 20.

One of the factors that weighed on the price of gold was the strength in the US dollar index.

Source: CQG

As the daily chart of the March dollar index futures contract illustrates, the greenback rose from 95.715 on February 28 to its most recent peak at 97.665 on March 7, the day gold hit its low. While the dollar index made a higher high on the March contract, technical resistance stands at 97.705, the mid-December 2018 high, on the continuous futures contract. The dollar index was at the 97.025 level on March 12, and the index contains a 57% exposure to the euro currency which has been highly supportive of the US currency over the past week.

The ECB did not help the yellow metal

The European Central Bank issued an extremely dovish statement at its most recent meeting when it told markets that economic growth in the Eurozone remains sluggish. The central bank downgrades its projections for GDP growth, and while QE ended in 2018, they have no plans to reduce their balance sheet and could even begin to start to add liquidity via loans to select banks and corporates to stimulate the economy. ECB President Mario Draghi’s term will end in October 2019, and it is unlikely that short-term interest rates will rise from negative 40 basis points before he departs.

The interest rate differential between short-term US dollar and euro rates stands at 2.65-2.90%, which favors the dollar. The most recent statement from the ECB suggests that the rate gap will not narrow anytime soon.

The dollar is the world’s reserve currency and the benchmark pricing mechanism for gold. Therefore, there is a long-term historical inverse relationship between the price of the yellow metal and the level of the US dollar. The most recent news from the ECB provided support for the dollar and weighed on the price of gold, sending it back to the $1280 per ounce level last week.

Another in a series of higher lows could be in the cards

Gold fell to a marginal new low on the April futures contract when it traded to $1280.80 on March 7, but it held a support level on the continuous contract.

Source: CQG

As the weekly chart shows, gold’s decline to $1280.80 last week did not challenge the late January low at $1275.30 which stands as technical support. Gold continues to trade in a pattern of higher lows and higher highs that has been in place since the mid-August low at $1161.40. Gold will need to hold $1275.30 on the downside to keep the pattern intact.

While the dollar is approaching its technical resistance level at 97.705 from mid-December, gold did not hit a new low during the final month of 2018 when the dollar index was on its high which was a sign of underlying strength in the precious metal.

Levels to watch in gold

The first level to watch on the downside is the 2019 low at $1275.30 per ounce in the nearby COMEX futures contract. Below there, $1200 and $1196.60, the mid-November low are support levels as is the $1180 late September 2018 bottom. Critical support stands at the August nadir at $1161.40. On the upside, there will be minor resistance at $1300, then at $1349.80, the 2019 high. Critical levels on the upside are at the 2018 peak at $1365.40 and the 2016 high at $1377.50 per ounce.

Gold remains above the midpoint of the August low and 2016 high which stands at $1269.45 per ounce. While the stronger dollar is a bearish factor for the yellow metal, it is not the only driving force for the path of least resistance for the price of gold.

Last week, the E-Mini S&P 500 futures contract put in a bearish reversal on the daily chart which is a reminder that the selling and period of fear and uncertainty that gripped markets in late 2018 could return. The trade negotiations between the US and China continue, and while markets have been optimistic over the chances for a deal that would end the wave of protectionist policies, there are no guarantees until the two sides agree on terms and Presidents Trump and Xi sign an agreement. The trade issue could continue to cause volatility in markets across all asset classes.

On March 29, the deadline for Brexit arrives. As of March 11, the UK and the EU have no deal and the potential for either a hard Brexit or an extension of the negotiating period stands to inject a degree of fear and uncertainty into markets. The ECB remains dovish, and the US Fed has paused its tightening cycle when it comes to short-term rates. While the rising dollar is bearish for gold, low interest rates tend to support the price of the precious metal. At the same time, stimulus in Europe and the US national debt at over $22 trillion increase the potential for inflationary pressures in the future. Gold tends to thrive in an inflationary environment. Those are just a few of the many factors that could cause the price of gold to continue its pattern of higher lows and higher highs leading to a challenge of the 2016 peak. Goldman Sachs (NYSE:GS) continues to call for gold to rise to the $1450 per ounce level in 2019 on the back of the many economic and political issues facing the world.

If gold continues higher, it will increase profits for gold mining companies and royalty streams for Franco-Nevada Corporation will rise.

Buying gold stocks – FNV offers value

Gold mining companies often provide a leveraged return compared to the price of gold. With royalty streams from producing companies in the US, Canada, Mexico, Peru, Chile, Australia, and Africa, FNV has a diversified portfolio. The company has limited overhead as the most recent disclosures show that FNV has only 32 full-time employees. Gold rose from $1161.40 in mid-August to $1344 on February 20 on the continuous futures contract, a rise of 15.7%.

Source: Barchart

Gold mining stocks lagged the price action in gold on the downside and fell to their most recent lows in mid-September 2018. On September 11, FNV fell to its bottom at $58.26 and then followed gold on the upside, reaching a high at $77.92 in late January. FNV rose by 33.7% which was over double the return in gold on a percentage basis. Despite the low number of employees, FNV has a market cap of $14.766 billion, pays a dividend of 1.28%, and trades an average of 577,866 shares each day. On Tuesday, March 12, FNV shares were just under their 52-week high at $77.92.

If the bullish pattern in gold that has been in place since mid-August continues to take the price to higher lows and higher highs, FNV is likely to continue to outperform the yellow metal on a percentage basis. Gold is over $50 below its most recent high, now may be the perfect time to add FNV to portfolios for a leveraged return if gold is going to the levels that Goldman Sachs expects in 2019.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls, directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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