“O Gold! I still prefer thee unto paper, Which makes bank credit like a bark of vapor.” – Lord Byron, Don Juan.
As the interlude in the trade war has ended, so have markets once again entered crisis mode. US President Donald Trump announced new plans on additional tariffs on Chinese goods which were subsequently followed by the Chinese government allowing its currency to fall to a level that has not been seen since 2008.
This was followed by larger-than-expected rate cuts in New Zealand, India, and Thailand. All of this preceded a sell-off in the S&P 500 and a shift from risky to risk-free assets. Lawrence Summers, from Harvard University, and Lukasz Rachel, from the Bank of England, have postulated that the neutral rate has shrunk from 3.6% in 1971 to just 0.4% in 2017, indicating that low, if not negative, rates are the new normal. Also, the US 30-year treasury (TLT) yield has dropped to even lower levels.
One of the biggest winners in this all was gold (GLD), which is now trading comfortably above $1,500/ounce. While the relationship between market uncertainty and gold is well known, there are more significant ways to profit from the yellow metal than directly investing in it.
Gold miners have been out of favor, barring a few brief periods, for nearly a decade. However, gold miners provide the investor with a levered gold trade. Primarily, this is due to the inelastic cost of gold production; it is an industry with very little in the way of variable expenses. When the price of gold rises, gold miners realize that an increase in price as nearly pure profit. It also tends to lag the rise in the performance of gold as investors revalue these stocks only when the long-run outlook on gold adjusts. So, with uncertainty in the market unlikely to subside in the near term, this provides a perfect opportunity to enter the gold trade.
With the weighted price/book ratio of the VanEck Vectors Gold Mining ETF (GDX) at 1.74, compared to the price/book ratio of the S&P 500 at 3, it seems that gold shares are currently trading at a discounted rate. This may be due to investors viewing the current rise in the price of gold to be temporary. However, in a market where central bank policy seems to have minimal impact on economic and stock performance, it seems likely that a gold price of $1,500/ounce is the new normal. If this is the case, expect gold stocks to rise dramatically, dwarfing the returns one could make on a pure gold trade itself.
*If you like my style of analysis, please hit the button at the top of the page to follow me. ----------------------------------------------------------------------------------------
The Lead-Lag Report is designed to help you stick to your goals through deep intermarket analysis. My research produces a weekly report that will give you an edge in reading the market for your asset allocation decisions.
You'll get short, intermediate, and long-term ideas built off of the four award winning white papers I co-authored on generating alpha and predicting stock market corrections.
Interested? Ignore fake news and get real market analysis. Try a two week free trial here and get The Lead-Lag Report today.
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: This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.