Eric Coffin: Backdrop is Basically Perfect for Gold and Gold Stocks

US Federal Reserve Chair Jerome Powell was in the news this week after ramming home the point that America’s economic outlook is far from certain.

In a Wednesday (April 29) press release following the latest two day Federal Open Market Committee meeting, the central bank said that COVID-19 presents not only a near-term economic risk for the country, but also a “considerable” medium-term risk.

While that’s not positive news for the US as a whole, Eric Coffin of Hard Rock Analyst pointed out in a Thursday (April 30) webinar that those in the gold space should take heart.

“The question is — and this is part of the reason why I expect this particular gold market to probably be a long-lasting bull market — what we don’t know, and I don’t think anyone knows this, is what’s the end game? What’s the exit?” said Coffin, who was speaking at the online Metals Investor Forum.

“(Powell) basically just said, ‘Look, it’s just not my problem right now — I don’t care what the exit is, I’m worried about keeping things from falling apart,” he continued.

“That’s alarming at one level, but it’s music to my ears as a gold investor because that tells me that this uncertainty and this desire to have non-financial-system assets is probably going to go on for awhile.”

Coffin noted that while gold did see a steep price drop in mid-March, a turnaround began after the first large monetary and fiscal packages were rolled out.

“It’s actually much like the great financial crisis — the move in gold that ultimately went for three or four years really started when they unrolled (the Troubled Asset Relief Program) in 2009 … I think we’re seeing a similar pattern here. I’ve got no reason to expect it’s going to be any different,” he commented.

Although gold is reaping the benefits of the current economic situation, not all gold stocks are enjoying the same gains. Coffin reminded listeners that gold stocks tend to move in a specific order.

“So far it’s largely been companies that are … farther up the food chain than the juniors — in other words, development-level companies, ones that have feasibility studies, ones that are literally on the road to production, construction,” he explained. “The other group that seems to be getting a lot of benefits so far is higher-grade stories.”

Coffin mentioned that some optionality plays — companies with large, low-grade deposits that have potential but are uneconomic at current prices — are also beginning to move. Select juniors are going up as well, but usually it takes time for money to filter down to these smaller companies.

Part of the reason gold stocks are gaining momentum right now is that generalist investors — those who aren’t normally interested in gold — are coming into the market.

“I’ve had a lot of conversations with a lot of CEOs lately — many, many, many of them are starting to get calls from generalist investors,” said Coffin. In his opinion, that’s because most sectors are going to do “quite badly this year.” He quipped, “Fed or no Fed, it’s not going to save them.”

Coffin expects this generalist interest to pick up moving forward, and said that the second quarter is likely to bring an influx as funds notice that gold stocks are performing well.

“That’s when I think we’re going to see a lot more generalist money and funds basically saying to their traders, ‘Get me $50 million in gold stocks, I need to show 2 or 3 or 4 or 5 percent of the fund is in this sector because it’s the winning one.'”

The presentation from Coffin was fairly wide ranging, and he did touch on factors that could turn gold off its positive course. But overall he is optimistic about the yellow metal’s prospects moving forward.

“I think we’re going to have to wait for a bunch of numbers to pile up … but essentially the backdrop we’re in right now and that I see going forward on Wall Street — relatively weak equities, debt keeping the yield scores down and concerns about some kind of reset … everybody’s thinking about heading outside of the fiscal system assets,” he said.

“This is basically a perfect backdrop for gold and gold equities. If you were going to design a backdrop that would be positive for gold, this is pretty much what you’d come up with, short of the virus obviously … I think this is the right place to be in the market for certainly the rest of the year and probably longer than that. I think the gold sector’s going to do very well.”

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.