$GLD, $USD, $GOLD
FLASH: The Real Story on Gold is the Gold Miners!
A growing chorus of big managed money is turning increasingly bullish on miners as late-cycle angst and industry shifts make conditions ripe for a prolonged rally.
Mining shares have gained at more than 2X the pace of the precious Yellow metal this year, even as gold price hit a 10-month high Tuesday, and the evidence suggests they can outperform the physical metal in an economic slowdown.
Over the last 10 years,the miners traded with a correlation of 0.8 and a beta of 1.8 compared to gold. That means the 2 elements moved in lockstep, but when gold rallied investors who bet on miners were rewarded with a return about 80% larger.
Quantitative strategists are seeing a list of reasons to like gold and gold miners just now. They are adding both, but see a tactical case for shares of the producers in particular.
“One of the Key strategic themes that underlies our outlook is that we think there is a low return outlook across asset classes,” 1 strategists wrote last week. “The practical issue of holding gold is the lack of yield, or an ability to value it in a conventional way. So for portfolio managers of equity and multi asset portfolios an attractive alternative might be to hold the equity of gold miners.”
The growing interest in gold and associated assets comes at a critical time for global markets. Equities and debt have been surging in Y 2019 as investors chase late-cycle gains, but the rally has been laced with doubt as economic data increasingly points to a global slowdown. Heavy-weight commodity analysts have recommended buying both gold and miners this year, saying the metal should break out in Y 2019 amid a scarcity of safe havens.
Other reasons to look at miners.
Merger and acquisition activity suggests the industry itself is bullish. Barrick’s $5.4-B purchase of Randgold Resources Ltd. set off a chain reaction that led to Newmont Mining Corp.’s $10-B deal for Canada’s Goldcorp Inc. last month.
When miners start acquiring each other, this suggests the market is under-pricing the value of their assets e.g. the gold they have yet to mine.
Not only are gold miners’ stocks attractively valued relative to their reserves and the price of bullion, but also compared with the materials sector as a whole and with global equities in general.
Miners outperform gold prices in Y 2019, but the ETFs backed by the physical metal have seen inflows worth almost $2-B in Y 2019, while those tracking mining shares have seen $1-B in outflows.
Some investors prefer bullion because miners expose them to more uncertainty, such as to bad management, operational difficulties and financial risks, but gold has no counter party risk.
The rising gold price and flows into physical ETF are a sign that the Fed’s dovish pivot and worries over global growth will trigger bigger allocations to gold producers.
When we see gold’s price at about 1400 oz the equity window will open.
In the meantime, the price move looks bullish to me.
- Gold: +1.7% at $1344.25 oz Tuesday
The Van Eck Vectors Gold Miners ETF, which tracks mostly Canadian-listed companies, has risen 9.8% YTD, with the FTSE/JSE Africa Gold Mining Index up 17%.
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