Sentiment: The Gold Market Isn't Worried About Anything

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About: Oppenheimer Gold & Special Minerals Fund A (OPGSX), Includes: AAAU, BAR, DGL, DGLD, DGP, DGZ, DZZ, GHS, GLD, GLDI, GLDM, GLDW, GLL, GOLD, IAU, IAUF, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Michael Fitzsimmons
Summary

Gold has been stuck in neutral despite a plethora of geopolitical developments that would typically push the precious metal higher.

Apparently, it will take an actual "event" to impact gold sentiment, though any objective investor would agree the odds of such an event have risen dramatically over the past few weeks.

I continue to recommend American investors have a small to medium position in gold bullion or equities for the day when such an "event" actually occurs. And one will.

Gold bullion or a gold and precious metal mutual fund (I suggest one) is a must-have for well-diversified portfolios.

(Source: Yahoo Finance)

The gold market, as measured by the SPDR Gold Trust ETF (GLD), has essentially gone nowhere over the past 5 years. As my followers are aware, I made a bullish call on gold when Trump was elected, as it was my view that massive deficits and global geopolitical uncertainty would soon follow and push the precious metal higher (see "Gold: The Possibility of a Trump-Induced Bull Run"). Obviously, that thesis has yet to work out as suggested. Though not because the underlying predictions were wrong (they were not), but because gold market sentiment is simply not worried about anything these days.

Consider the list of "issues" (for lack of a better word) that one would have thought might have led to a move up in gold.

The U.S. Federal Deficit

The Bipartisan Policy Center reports the 2019 deficit through March was a staggering $691 million and is on track to hit $1.1 trillion by the end of the fiscal year (September 30th):

(Source: BPC Deficit Tracker)

Of course, Americans got used to $100 billion monthly deficits following the "Great Recession" of 2008, but what's different now is that the U.S. has a rather strong economy and record-low unemployment. Equally alarming is the "off-budget" spending for natural disaster relief, which seems to surge higher year after year as the results of global warming are definitely coming home to roost (see"Global Warming Will Help Push Gold Higher").

In fiscal 2017, U.S. (off-budget...) climate-related disaster costs exceeded $300 billion - roughly 25% of that year's total annual deficit ($1.27 trillion). As the Washington Post explains, taxpayer spending on disaster relief has "exploded" higher due to global warming and population changes:

Disaster Relief Spending

But the gold market? No worries!

Iran and the Persian Gulf

Recent Iranian sable rattling over U.S. sanctions on the country's oil exports prompted the U.S. to send the USS Abraham Lincoln Carrier Strike Group and an Air Force bomber task force to the Middle East five days ago. Yesterday, the U.S. sent the USS Arlington and a Patriot battery to join the USS Abraham Lincoln. Obviously, tensions in the Persian Gulf are running high.

(Source: USNI News)

As if military confrontation in the Persian Gulf wasn't enough to worry about, Iran announced on Wednesday it was no longer committed to parts of the treaty with respect to its nuclear program. Iran reached out to European countries for help vis-a-vis the sanctions in a quid pro quo to save the nuclear treaty. However, while European countries said on Thursday they wanted to preserve Iran's nuclear deal, they rejected "ultimatums" from Tehran. Stay tuned...

But the gold market? No worries!

North Korea Missile Launches

Meanwhile, North Korea is launching missiles again, and the WSJ reports these new missiles are likely better able to evade missile defense systems. It would appear the much ballyhooed photo-op meeting between Trump and Kim has led to little actual and meaningful progress on this critical issue. North Korea continues to develop its systems and launch missiles. One could say North Korea launching missiles again is an actual "event", but it certainly didn't change the sentiment in the gold market.

The gold market says, "No worries!"

The U.S. / China Trade Negotiations

Trade discussions between the U.S. and China continued this week, but no deal was reached and the U.S. started machinations in order to more than double tariffs on $200 billion in Chinese goods, from 10% to 25%. Even CNBC said it is time for markets to "end the illusion about a US-China trade deal."

While Trump continues to say the increase in tariffs will go to the US Treasury, most economists agree price increases will be passed directly on to the American consumer at places like Walmart (WMT) and Costco (COST). Such a development could bring on at least two potential problems: an increase in inflation and/or a significant weakening of the economy. Many companies are talking about potential layoffs.

Also note that a trade deal doesn't necessarily mean Trump will lift the tariffs. Note that the aluminum and steel tariffs put on Canada and Mexico have yet to be lifted, even though tentative agreement was reached on the "USMCA" trade deal.

But the gold market? No worries!

The Federal Reserve

Meanwhile, Trump's two picks to join the Federal Reserve - pizza king Herman Cain and "economist" Stephen Moore were widely criticized and withdrew their nominations. Apparently Larry Kudlow, Trump's top economic advisor, is now in hot water with the President over those recommendations. But that doesn't stop Trump and his team from brow-beating Federal Reserve Chairman Jerome Powell at every opportunity, insisting that rates be reduced another 1% and a quantitative easing be restarted. This despite the "greatest economy of all-time" and record low unemployment.

But the gold market? No worries.

No Worries!

Not only has the price of gold not risen, but so too the typical gold funds (i.e., equities) one might invest in for exposure to a potential gold price increase haven't been rising much either.

However, the top precious metals choice for US News "Money," the Oppenheimer Gold & Precious Metals Fund (OPGSX), is an exception:

(Source: Yahoo Finance)

As shown in the graphic above, shares of OPGSX are lower now than they were five years ago. That said, the fund has a 4-star rating from Morningstar and invests mainly in common stocks of companies that are involved in mining, processing or dealing in gold or other metals or minerals, gold bullion, and other physical metals. The fund can also invest in precious metals-related ETFs and may invest all of its assets in those securities. Under normal market conditions, at least 80% of the fund's net assets, plus any borrowings for investment purposes, will be invested in those securities. It can also invest up to 25% of total assets in the Oppenheimer Gold & Special Minerals Fund (Cayman) Ltd., which is a wholly owned and controlled subsidiary of the fund.

The net expense ratio is 1.16, as compared to the group's average of 1.4. But note, year to date the fund is up ~2%, and that roughly in-line with the GLD ETF's 1.9% YTD return. (Note: The YTD return figure has been corrected from the original version after the author found the data source to have been in error.)

The fund's top 5 holdings appear to be exactly the kind an investor wants to see in an gold and precious metals equity fund:

Oppenheimer Gold & Precious Metals Fund Top-5 Holdings

Company Symbol Country % of Fund
Northern Star Resources Australia 6.6%
Evolution Mining Australia 5.5%
Ivanhoe Mines Canada 5.0%
Kirkland Lake Gold Canada 4.8%
Barrick Gold Canada 4.1%

As can be seen, the top 5 holdings represent 26% of the fund. About half the fund's total assets are in Canadian companies, which is ~11% underweight in comparison to the Philadelphia Gold & Silver Index. OPGSX appears to be have taken on a bit more risk (i.e., highly levered to both upside and downside movements in gold) due to its higher concentration of mid-cap companies at the top of its holdings. The first large-cap holding in the fund is Barrick Gold (GOLD), the 5th-largest holding. But it is clear this fund is outperforming the price of gold and could be more forward-looking than the gold market.

Summary and Conclusion

The gold market appears to be "whistling through the graveyard," in my opinion. There appears to be no credence in the gold market that a plethora of potential geopolitical events can actually happen. History shows that an event will, at some point, occur. Meanwhile, the U.S. Federal deficit continues to balloon ever skyward despite the booming economy. One can only imagine what will happen to the Federal deficit if the economy slows due to a trade war. Meanwhile, "off-budget" spending on natural disaster relief also is climbing skyward, and I fully expect Congress to spend money to relieve farmers who are taking it on the chin due to the trade war with China.

The bottom line is that while my thesis for higher gold prices has yet to lead to success, the underlying reasons are still fully intact. Zooming Federal deficits and massive geopolitical uncertainties (both trade and military) should support the precious metal and lead to a breakout should an event actually occur. While gold bullion is a great hedge, investors may want to consider the Oppenheimer Gold & Precious Metals Fund. The fund has a below average expense ratio and is more highly levered to a pop in the price of gold, which I believe will happen sooner rather than later. This fund could easily deliver a 12-month gain of 25% (or more), should gold make a decent move higher.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long gold bullion. I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for investment decisions you make.