- Gold had an uptick over the past 12 months, but this is a function of a lower dollar.
- Gold stocks have not rallied, because in local currency terms around the world, gold is mostly down.
- Unless we see gold investment demand, gold will not rally, and miners as a sector will continue to underperform.
Gold stocks have performed horribly over the past 12 months - this despite the fact that gold (GLD) itself has been up by about 6% over the same period. The question is why?
Before we explore the answer, let me tell you I use gold stocks as a proxy for what physical gold might do. Reason being, gold stocks behave like regular stocks. Their price is a function of earnings, debt, EBIDTA and so forth. And because stocks are smarter than the metal, they can smell when gold is about to rally, and gold stocks front-run it (my opinion).
Gold on the other hand is simply a function of investor appetite for gold, for whatever reason. If investors buy into gold ETFs and bullion funds, then gold will go up. However it's totally arbitrary when, and why, investors buy gold.
The question, however, is: If gold stocks are a proxy for gold, and gold has been up by about 6% over the past 12 months, why are gold stocks down?
As the above chart depicts, the Philadelphia Gold & Silver Index (HUI) is down by about 7%, and ETFs like the Vaneck Gold Miners (GDX) and the Vaneck Gold Junior Miners (GDXJ) is down by about 5% and 14% respectively.
Well, the answer might surprise you. The answer is that gold is not really up by 6% since last year. It's up in dollar terms, but please remember that the dollar has been falling across the board over the past 12 months.
So the answer as to why gold stocks have not rallied with gold up 6% over the past 12 months is that gold is not up but actually down in local terms around the world.
As the chart above shows, if you live in South Africa (EZA), gold is down in local terms.
So since many miners operate in many parts of the world, it actually costs more to mine gold in local currency when the value of gold falls in local currency.
That's my theory as to why gold stocks for the most part have not performed well over the last 12 months.
As to why gold has not gone up in value over the same period relative to the dollar, the answer is simple: Investment demand for gold is down by a lot in 2017.
source: World Gold Council
As you can see from the above table, investment demand for gold is down 23% Y/Y, and ETF demand is down by 63%.
Unless we see investment demand for gold outstripping supply, as we did several years back, gold is not going to go anywhere. At best, it will adjust in U.S. dollar terms if the dollar keeps falling.
Yes, gold will have its day once more and so will gold stocks. But as to the timing, it is impossible to tell.
The minor uptick in gold Y/Y is a function of a lower dollar, and not because there was a demand for gold.
Gold is actually down in most local currencies, which puts margin pressure on miners.
Unless we see investment demand for gold, it is my opinion gold will not see substantial appreciation in gold, and it will be difficult for gold shares to rally as a group.
Yes there are always miners who will outperform within the group, but a rally for the entire group as a whole is difficult today.
When will gold go up and why? When we see investment demand, which is arbitrary when it will happen.
This article was written by
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