Possible default wave in US may be bullish for Gold Stocks

In what is a bullish sign for Gold stocks on the TSXV, The United States of America may still face a wave of defaults. Despite the current recovery, according to Reuters, household debt and business debt are at record levels, and the reduction in business activity in some regions has made it challenging for these businesses to service their debt.

 

“As many households continue to struggle, loan defaults may rise, leading to material losses” for lenders, the Fed said in its latest biannual Financial Stability Report. Business debt “has risen sharply as businesses increased borrowing to weather the period of weak earnings. The general decline in revenues associated with the severe reduction in economic activity has weakened the ability of businesses to services these obligations.”

While this does bring up a separate but important topic of zombie companies, that is a subject for another day. The warning signs here show the possibility of a default wave, which would almost certainly mean monetary easing in order to sustain the markets. This would result in Gold prices rising, and naturally Gold miners on the TSXV stand to gain from such.

“So far, strains in the business and household sectors have been mitigated by significant government lending and relief programs and by low interest rates,” the Fed said on Monday.

But that could change depending on the course of the pandemic and the course of the recovery.

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The Fed noted that the real estate market is showing signs of strain as vacancy rates rise and rent growth slows or turns negative. About 7% of home mort age holders are behind on payments, compared to around 5% before the pandemic, though most are in forbearance programs with their lenders.

Among small businesses “credit quality … has worsened notably since the COVID-19 outbreak and has not yet stabilized, with many small businesses closing or scaling back operations significantly during the crisis,” the report stated

“In the near term, risks associated with the course of COVID-19 and its effects on the U.S. and global economies remain high,” the Fed reported.

The concern is not limited to the Federal Reserve. The IMF has also published a warning of the impacts of the COVID-19 virus, and the uncertain environment as a result of such.

The last bullet of their Executive Summary would be of particular importance:

As economies reopen, accommodative policies will be essential to ensure that the recovery takes hold and becomes sustainable—see the following Policy Road Map. The post-pandemic financial reform agenda should focus on strengthening the regulatory framework for the non-bank financial sector and stepping up prudential supervision to contain excessive risk taking in a lower-for-longer interest-rate environment.

This indicates the possibility of another round of stimulus, which is bullish for the metals sector. While we believe the sector is still bullish without further stimulus, expansionary monetary policy will certainly contribute to an acceleration in price increases.

With a majority of the junior Gold listed companies being listed on the TSXV, this is a ripe opportunity to buy shares in stocks that have the potentialy to deliver multiples of 100% returns.

We remain bullish on TOC, which remains tremendously undervalued. Trading at $0.35 a share, the stock is worth north of $1.50+ using conservative measures of adjacent assets. You can read the full report here.