GDX: Patience Needed Until Intermediate Decline Is Complete

Summary

• GDX enables investors to reduce risk somewhat by investing in a bunch of mining companies.
• We continue to believe that sustained gains are coming for GDX due to a weaker dollar and higher gold price.
• Investors looking to put fresh capital to work should refrain from buying at this point.

We wrote about the gold mining ETF (NYSEARCA:GDX) back in April and stated that any sell-offs would be temporary in this asset class. The initial reason behind our bullish pretense was the fact that the Fed was backstopping the financial system with freshly-printed currency and this has not changed. In fact, the Fed has since come out and said that it will continue its asset purchases indefinitely and leave interest rates low for a sustained period of time until the job market recovers.

Whether the Fed is able to achieve the above remains to be seen. Remember inflation is the result of an increase in the money supply (quantitative easing) as well as elevated economic activity (velocity). We definitely have had inflation since the Fed embarked on this experiment but it mainly has shown up in asset prices such as stocks and real estate. The question now is whether all this quantitative easing will finally result in much higher food prices. If this happens, we would expect to see people losing confidence in currencies like the dollar.

With respect to gold and specifically GDX, there is very little the Fed can do to stop this present bull market. It can’t raise interest rates significantly if inflation rises because of the exorbitant debt load. When increasing the price of the currency is not an option, governments usually turn to initiating price controls but again this would not stop a potential exodus out of the greenback into hard currencies like gold.

As we discussed in a previous article, what investors need to remember is that commodities and specifically precious metals have always outperformed in periods of currency debasement. The benefit that precious metals bring to the table in these environments is that they can act as a commodity and also a currency. As we recently

Analyst’s Disclosure:I am/we are long GDX. 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.