lunes, septiembre 16, 2019

GOLD TREMENDOUS RUN / SEEKING ALPHA

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Gold's Tremendous Run

by: Michael A. Gayed, CFA


Summary
 
- Gold prices have dropped almost 4% in the past 5 days.

- This may be a good potential entry point.

- Gold-miners offer a strategic trade for those with a stomach of iron.

     
All that is gold does not glitter.
-J.R.R. Tolkien, The Fellowship of the Ring
 
Gold and gold related stocks have had a tremendous run for the past year. Gold as measured by the SPDR Gold ETF (GLD) is up 24% over the past 12 months. The Van Eck Vectors Gold Miners ETF (GDX) has a whopping 57.8% return over the same period. For the past 5 days, they have pulled back, 3.8% and 10.4%, respectively. This pullback is giving those of us who missed the rally a chance to enter it.
 
 
 
 
Gold has always been a store of value and an alternative to government issued currency. It is usually viewed as a hedge to market uncertainty and inflation. Inflation is not a problem for the US or the global economy, but market uncertainty is strong at this point. With a yield curve that has inverted numerous times, trade conflicts and tariffs, a presidential election, Brexit, and super-low interest rates, having a small portion of your portfolio in gold could be a wise move.
 
When the equity markets pullback there is a strong inverse relationship with gold doing well.
 
Like all commodities, the price of gold is subject to supply and demand problems. Outside of financial investment, gold is mostly used in jewelry which can have a seasonal effect on the price of gold. Also, the lower interest rates on government debt should help keep the price of gold elevated.
 
Low interest rates support gold because people are looking for “safe” ways to invest since bonds pay so little income. The weak dollar has also strengthened gold as it is cheaper for foreign buys to buy and hold gold priced in USD. As the pullback in gold continues, this is a good opportunity to start or add to your holdings through SPDR Gold Shares (GLD) to offer your portfolio some protection from the next downward swing and for the long-term.
Gold miners are an entirely different investment than gold. The miners tend to have much greater volatility than gold. GDX has a 10-year annualized standard deviation of 34.9, whereas GLD’s is a much lower 16.6. Gold mining stocks face numerous risks including the exploratory costs and potential for a mine to produce less than expected, natural disasters, and political involvement. All these events have a significant impact on the price of gold.
 
There has also been consolidation in the mining industry with Newmont(NEM) buying Goldcorp plus Barrick Gold (GOLD) and Newmont joining forces for a mine in Nevada. These partnerships should help the companies in cost efficiencies and scale. The Van Eck Gold Miners ETF (GDX) is a great way to get exposure to this segment of the market. Only jump in if you can handle the volatility and be ready to get out if there is a change in direction.
 
The chart shows how GLD over the long-term has significantly outperformed the gold miners. Over the past 10 years it is a difference of 83%. Of course, it is obvious the S&P 500 has far exceeded both gold and gold miners over that period. GDX is not for the faint of heart and any investment in it should be used as a short-term trade rather than a long-term buy and hold strategy.
 
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