Safe Havens Provide Shelter From The Volatile Storm

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About: VanEck Vectors Junior Gold Miners ETF (GDXJ), Includes: AAAU, AFB, ASA, BAF, BAR, BBF, BBK, BFK, BKN, BLE, BSD, BYM, CXH, DGL, DGLD, DGP, DGZ, DJPY, DMB, DMF, DSM, DTF, DUST, DZZ, EIM, EIV, EOT, EVN, EXD, FLMB, FMB, FMN, FXY, GDX, GDXS, GDXX, GGN, GLD, GLDI, GLDM, GLDW, GLL, GOAU, GOEX, IAU, IAUF, IIM, IQI, JDST, JNUG, JYN, KSM, KTF, LEO, MEN, MFL, MFM, MFT, MHD, MMU, MNP, MQT, MQY, MUA, MUB, MUE, MUH, MUS, MVF, MVT, MYD, MYF, MYI, NAD, NEA, NEV, NIM, NMI, NUGT, NUV, NUW, NVG, NXP, NXQ, NXR, NZF, OIA, OUNZ, PBND, PHYS, PMF, PML, PMM, PMO, PMX, PRB, PVI, PZA, QGLDX, RING, RVNU, SGDJ, SGDM, SGOL, TFI, UBG, UGL, UGLD, UJPY, VFL, VGM, VKI, VKQ, VMO, VTEB, XMPT, YCL, YCS
by: Andrew Hecht
Summary

Risk off over trade.

Other issues on the horizon.

Gold surprises on the upside.

Bitcoin takes off over China.

Bonds and the Japanese yen rally - gold continues to rally in all currencies, telling us that mining shares are cheap.

Markets have entered a new dimension in May. After the volatile fourth quarter, the markets calmed, and stocks regained all of their losses over the first four months of 2019. The price of crude oil also made an impressive comeback. After a decline from $76.90 on the nearby NYMEX futures contract in October to a low at $42.36 in late December, the price climbed back to the $66.60 level in late April.

The Fed canceled its interest rate hikes for 2019 earlier this year which helped fuel the rally in stocks, and optimism on a trade deal lifted the price of many industrial commodities. The price of copper, a bellwether market for the Chinese and global economies, rose to almost $3 per pound on the active month COMEX futures contract after falling to below $2.55 per pound, which was a new low, on the second day of trading in 2019. However, May has brought new turbulence to markets as the trade talks broke down and the dispute escalated with new tariffs and retaliatory measures by each side over the past week. The political temperature in the Middle East and Asia has risen over recent weeks, and fear of a risk-off period in markets has returned for investors.

Gold, Bitcoin, US bonds, and the Japanese yen have been safe haven markets during times of rising fear and uncertainty, and these markets have attracted buying over the recent weeks as stocks turned south along with industrial commodities prices and those caught in the crosshairs of the trade dispute. If the current trend is just getting started, gold stocks could offer investors and traders lots of upside over the coming weeks and the VanEck Vectors Junior Gold Miners ETF (GDXJ) could be worth buying at the current price level as it tends to outperform both gold and the GDX during market rallies in the yellow metal.

Risk off over trade

The optimism over trade shifted to pessimism last week when negotiations broke down after the US claimed that China had backtracked on significant issues in the deal. On Friday, May 10, President Trump increased tariffs on Chinese exports to the US to 25% and on May 13, China retaliated with more duties on US goods that flow into China.

While the escalation of protectionism impacts both the Chinese and US economy, China is suffering more under the weight of tariffs.

Source: CQG

As the chart of the S&P 500 SPDR highlights, the US stock market index dropped from a high at 294.95 on May 1 to a low at 279.93 on May 13, a decline of 5.1% before recovering back to the 288.35 level on May 16.

Source: CQG

The chart of the iShares China Large-Cap ETF (FXI) shows that the measure of Chinese equities declined from a high at $45.96 on April 5 to a low at $40.32 on May 13 or 12.3% before recovering to $41.90 on May 16.

The roadblock that caused an escalation of the trade dispute had a more significant impact on the Chinese stock market, but both have suffered losses since their recent highs.

Other issues on the horizon

Trade between the US and China is not the only issue facing markets these days. Last year, the US walked away from the 2015 nuclear nonproliferation agreement with Iran, and new sanctions on the theocracy in Teheran took effect in November 2018. However, the US issued six-month exemptions to eight countries that purchase crude oil from the Iranians. Last month, the US informed the world that it would not extend the exemptions as it tightened the economic noose around the necks of the Iranian leadership. At the same time, the US declared at the Iranian Revolutionary Guard is a terrorist organization. Iran retaliated by saying that all US military personnel stationed in the Middle East are terrorists. Iran had said that any moves to prevent sales of their crude oil to customers around the world would cause them to take action so that no other oil-producing nations in the region can ship their oil to customers. The Strait of Hormuz which is a narrow sea passage between the Persian Gulf and the Gulf of Oman is a chokepoint for 20% of the world's seaborne crude oil each day, and it borders on Iran. Increasing rhetoric over the recent weeks caused the US to dispatch the USS Abraham Lincoln and military personnel to the region. This week, attacks on four tankers off the coast of the UAE and the Strait of Hormuz and a drone attack on a Saudi oil pipeline had the fingerprints of Iran.

The situation in the Middle East has caused the differential between Brent and WTI crude oil to rise to its highest level of 2019 over the recent trading sessions. Middle Eastern crude oil uses the Brent benchmark, and the increase in political risk has caused the Brent premium to rise.

Source: CQG

The spread that reflects the price of WTI minus Brent July crude oil futures shows that it traded to a high at $9.75 on May 15. The premium for Brent reflects the rising geopolitical risk in the Middle East as an increase in hostilities that impact production, refining, or logistics for crude oil could cause the price to spike to the upside over supply concerns. The Middle East is the home to over half the world's crude oil reserves. At the same time, Russia's alliance with Iran complicates matters in the region.

While the risk of a war in the Middle East is rising, problems in Asia have returned and could enter the spotlight over the coming weeks and months. After President Trump and North Korea leader Kim Jong Un failed to reach an agreement and their summit came to a sudden end earlier this year, North Korea resumed testing missiles and rockets. The hopes of a denuclearized North Korea have faded, and the tension between Pyongyang and Washington has increased since the abrupt end to the summit. With China and the US on the opposite ends of a trade dispute and China's support for North Korea, the political temperature in Asia has also risen.

Domestically, the 2020 Presidential election is getting underway with twenty-three candidates from the opposition party lining up for a chance to challenge President Trump who will likely be the nominee of his party. At the same time, the opposition control of the House of Representatives could be preparing for impeachment hearings even though there are not enough votes in the Senate to remove the sitting President from office. If the 2016 Presidential contest was politically divisive, the 2020 election promises to be even more contentious.

The Middle East, Asia, and US domestic politics are enough to caused periods of fear and uncertainty in markets across all asset classes. The weak economic conditions in Europe and the ongoing saga of Brexit along with any surprises that could crop up over the coming weeks could fuel lots of volatility in the stock, bond, currency, and commodity markets at the blink of an eye.

Gold surprises on the upside

During the most recent period of selling in the stock market over trade issues with China, many commodities prices including copper, crude oil, and most precious metals experienced declines, but the price of gold went the other way.

Source: CQG

As the daily chart of the active month June gold futures contract highlights, the price of the yellow metal had probed below the $1270 level in late April and early May, but the price found a temporary bottom and had traded up to the $1300 per ounce level over recent sessions. Gold attracted safe-haven buying as fear and uncertainty returned to markets over the recent week. On Monday, May 13, gold put in a bullish key reversal trading pattern on the daily chart. On May 16, the precious metal pulled back from its most recent high at $1304.20 on May 14. With gold under $1290 again it may be a good time to begin buying the metal on a scale-down basis.

Bitcoin takes off over China

In late 2017, the price of Bitcoin, the leader of the digital currency asset class traded to a high at over $19,000, which was quite amazing considering it was at six cents in 2010. However, 2018 and early 2019 was an ugly period as the price sunk to the $3300 level.

As part of the trade dispute between the US and China, the Chinese government reduced interest rates and devalued its yuan currency to stimulate the economy. The price of Bitcoin has taken off to the upside as the cryptocurrency has also become a safe-haven asset in the current environment.

Source: CQG

The weekly chart of the CME Bitcoin futures contract illustrates that the price of the asset began to rise from a low at $3300 during the final week of January. After breaking through the $5000 level, Bitcoin has appreciated to a high at $8445 and was trading at $8010 on May 16, almost 143% above the low from earlier this year. Bitcoin has broken out to the upside, which is a sign that capital is flowing to an asset where governments have little if any control. The strength in Bitcoin reflects a lack of faith in the governments of the world, and the buying in gold could reflect the same.

Bonds and the Japanese yen rally - gold continues to rally in all currencies, telling us that mining shares are cheap

Two other markets that tend to attract capital during uncertain times have also been climbing over the recent sessions. The US 30-year Treasury bond futures have moved to the upside as money has been flowing to less risky assets.

Source: CQG

The daily chart of the 30-Year Treasury shows that the June long bond has moved from 143-16 on March 4 to its most recent level at 149-16 on May 16. At the same time, the Japanese yen has also been rising over the past weeks.

Source: CQG

As the chart of the yen versus the US dollar shows, the yen has also been trending to the upside moving from $0.008934 on April 24 to its current level at $0.00911.

The price action in gold, Bitcoin, US bonds, and the yen are sending us a signal these days, and we could see a lot more upside in these asset prices if the trade dispute escalates, the Middle East deteriorates, or any of the other issues facing the world cause fear to rise over the coming days and weeks.

Gold has been making higher lows and higher highs in all of the leading world currencies including the dollar, the euro, and the yen since the turn of this century. Gold mining stocks typically outperform the price of gold on a percentage basis on the upside and underperform on the downside. The VanEck Vectors Gold Miners ETF (GDX) holds shares in many of the leading gold companies, but the VanEck Junior Gold Miners ETF is typically more volatile than both the price of gold and GDX. The fund summary for GDXJ states:

The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® Global Junior Gold Miners Index. The fund normally invests at least 80% of its total assets in securities that comprise the index. The index includes companies that generate at least 50% of their revenues from gold and/or silver mining/royalties/streaming or have mining projects with the potential to generate at least 50% of their revenues from gold and/or silver when developed. It is non-diversified.

The most recent top holdings of GDXJ include:

Source: Yahoo Finance

GDXJ had been under pressure as the price closed at the end of 2018 at $30.22 per share and traded in a range from $28.04 to $35.04 per share so far in 2019.

Source: CQG

As the chart shows, at $28.43 per share GDXJ remains not far off its low for 2019. Technical resistance for gold on the weekly chart stands at the February 2019 peak at $1344, the 2018 double-top at $1365.40, and the 2016 post Brexit high at $1377.50 per ounce. Given the issues facing markets, a rise in the price of gold above those levels could trigger massive buying in the GDXJ ETF product which offers lots of liquidity with $3.63 billion in net assets and over 13.6 million shares changing hands on average each day.

Safe-haven assets provide shelter during periods of fear and uncertainty in markets. The current state of the world could mean that we are at the very beginning of a very volatile period that will lift the prices of gold and the other assets that attract capital during tumultuous times.

The safe-haven assets backed off on May 16, which could be a good time to begin accumulating gold and the other products as the issues facing markets are not going away anytime soon.

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: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

The author is long precious metals