This past week has not been kind to Gold or any of the other precious metals. At a time of distressed global markets, many have fled to Gold for it’s reputation as a good ‘safe haven’ during times of trouble. For anyone seeking refuge in the warming light of Gold at the moment though it has not been displaying such characteristics.
Here is daily chart for Gold, showing the run up it had during 2019 to the present.
It started moving higher in 2019 due to US-China trade tensions and central bank easing policy, got a further boost from US-Iran tensions building and then another boost as China became gripped by the Coronavirus outbreak.
At the end of February 2020, it suffered a huge fall when global stock markets pulled back rapidly, leading to the fastest 10% correction from a high for the DJ30 index in history. The damage inflicted on the Gold price was mainly attributed to traders and investors needing to sell something to raise cash/service margin-calls and Gold became an easy target.
There was a rapid recovery in the price of Gold as the Coronavirus outbreak started it’s spread across the globe but as stocks markets started to take realise how extensive the economic consequences could be, and the outbreak officially became labelled a Pandemic, Gold once again started to sell-off as stock markets made more historic moves, the Dow enduring its worst week since the global financial crisis of ’08-09.
In an interview with MarketWatch, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said “some investors who were reluctant to part with their equities at depressed prices were able to sell gold in order to meet the margin calls,” and went on to say “This is exactly the same as what happened a week and a half ago before the emergency rate cut from the Federal Reserve, and when equities dropped dramatically in 2008, 2001, 1987, etc.” “In all those previous cases, investors were able to take advantage of gold’s liquidity to meet margin calls, and the gold price quickly recovered within days [or] weeks. That is what I am expecting to recur this time around.”
Through this pullback in Gold I’ve been investing into the VanEck Vectors Gold Miners ETF [$GDX] and that has seen punishment on a whole new level. Gold was down 8.91% for the week, but the GDX has fallen an incredible 35.40%. The ETF does traditionally act with magnified volatility to the movement in Gold price but with this kind of move you’d think it was a 3X leverage Proshares fund! Even more crazy is the Juniors ETF, the GDXJ, which is down a whopping 44.74%. And let’s remember that is just one week!
These price drops were not helped by Silver, which fell nearly 16%, and all the miners produce a lot of Silver with their operations. Silver has a large industrial use element to its price and with fears rising of a global recession occurring due to the Coronavirus pandemic it has been sold-off strongly. It will bounce as soon as the pessimism lifts and help the miners recover on the risk-on side of things.
I don’t own any GDXJ but I think both of the ETF’s are screaming value when looking at the medium term and will continue to invest in GDX. It’s creating painful drawdown right now but once the Coronavirus situation passes, attention will return the effect all the easing, stimulus, bail-outs etc that central banks and governments have undertaken and that will play into the hands of Gold and will feed through to the mining equities as markets find their footings.
Above is the Top 10 holdings for GDX and these companies are mature businesses that are well ran and well capitalised compared to 5 years ago. They got efficient when Gold tumbled towards $1,000/Oz in 2015 and the subsequent rally has enabled them to become much stronger businesses.
I listen to the podcasts of some big Gold bulls such as Peter Schiff, David Morgan and Grant Williams, and there are many compelling reasons for Gold rising above $2,000/Oz in the next 18 months. In the chart below I’ve shown how unloved the mining companies have become since Gold price peaked back in 2011.
GLD as a proxy for the Gold price is down 9.48% since the peak, but the miners through GDX have fallen 66.60% and are not far from testing the 2015 lows when Gold was around $1,050. I’ve written elsewhere about why I wanted some kind of exposure to Gold now but this disparity in performance along with my preference for equity investing is a big part the recent move to build GDX exposure.
Naturally I did not expect the kind of volatility this Black Swan event has lead to in GDX but I still think the rationale is sound and that despite the short-term pain, the portfolio will profit from this investment. Back in 2011, GDX was trading at $60 a share, and picking it up at under $20 now is a genuine bargain in my opinion.
For anyone looking at a more speculative investment, consider the current situation of GDXJ. On the 6th, March price was double the closing price from Friday. All it has to do is return to that price from a week ago to generate a 100% ROI trade without the need for leverage. Please remember to DYOR but I question whether the prospects for the Junior Miners have really deteriorated that much.
Thanks for your time.
