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Gold Continues To Sit And Wait- Gold Mining Stocks Should Outperform Gold On The Upside

Barchart - Wed Oct 20, 2021
Metals - gold bullion rounded

The last time I wrote a dedicated article on gold on Barchart was on September 12, over one month ago. December COMEX gold futures were sitting at the $1792.10 level when I wrote, “Gold remains comatose around the $1800 level. December futures settled at $1792.10 on September 10. The longer it sits in the current pattern of higher lows and lower highs, the more substantial the eventual move.” The sleepy price action in gold continues as the price was slightly lower at the $1784 level on Wednesday, October 20. 

Gold has made lower highs over the past fourteen months since reaching its all-time peak at $2063 per ounce in August 2020. However, at the $1784 level, the precious metal that is a commodity and the world’s oldest currency is over seven times the price at the 1999 low. Gold was the first commodity to rise to a record high in the aftermath of the 2020 global pandemic. More than a handful of other raw material prices have achieved that feat over the past months as the bull market in the commodity asset class continues to charge higher. Gold is waiting for the baton to pass back in its direction as the price consolidates below the $1800 per ounce level. 

Another inflationary reading in September

The latest consumer price index data came in hot as it rose more than the market’s expectations. Consumer prices overall rose 0.4% in September, making the year-over-year gain 5.4%. The consensus forecast was for a 5,3% rise. CPI rose the most since January 1991. 

Excluding food and energy, the gain was 0.2% for the months and 4% year over year.  According to the US Labor Department, rising food and energy prices offset declines in used cars in September. 

The Fed continues to call inflationary pressures “transitory,” but a prominent Democrat has warned that inflation is a clear and present danger. Larry Summers served as the Chief Economist of the World Bank. He was a senior US Treasury Department throughout the Clinton administration and was the Director of the National Economic Council for President Obama. He is a Democrat and economics professor at Harvard University. 

Last week, at a conference organized by the Institute of International Finance, he warned of 1970s-style inflation

Bloomberg News reported that he said, “We have a generation of central bankers who are defining themselves by their ‘wokeness.’ They’re defining themselves by how socially concerned they are.” Professor Summers went on to say, “We’re in more danger than we’ve been during my career of losing control of inflation in the US. We’ve gone even further towards losing it in Britain and I think we’re at some risk in Europe." He compared recent comments by Fed officials downplaying the risks of inflation to those in the 1970s before the economic condition raged out of control. Summers took aim at the central bank and others worldwide for not preparing markets and investors for the coming steps to rein in inflation. 

While many in the opposition party have been sounding alarms, the comments by an official from previous administrations from the majority party was a wake-up call. 

Meanwhile, the US is not the only country experiencing inflationary pressures. New Zealand’s inflation is surging at the fastest pace in over a decade. The economic condition in the UK, Europe, China, and around the globe has been rising. 

Gold turns a blind eye

Gold has taken an agnostic view of rising inflation over the past year and two months. The gold price at the $1784 level continues to consolidate the gains made in 2020 when the pandemic sent the precious metal from a low of $1452.10 in March to a record peak at $2063 in August. After a steady decline to a low of $1673.70 in March 2021, the continuous COMEX gold futures contract has mostly been trading in a range from $1700 to $1900 per ounce. 

Gold has turned a blind eye to the CPI data and other inflationary warnings in 2021. Even though most other commodity prices have reached multi-year or all-time highs over the past months, gold has been sleeping. While the trend has been primarily bearish over the past fourteen months, the long-term path of least resistance remains bullish.  

The long-term chart dating back to the 1970s shows gold’s trend turned bullish at the turn of this century. After over two decades, it remains in a bull market. Gold rallied to new all-time highs in virtually all currencies in 2019 and 2020. Gold is the ultimate currency as central banks, monetary authorities, and governments hold the metal as an integral part of their foreign exchange reserves, validating gold’s role as a means of exchange. Over the past months and years, central banks have been net buyers of gold, adding to their reserves. The bottom line is that fiat currencies have depreciated against gold since the late 1990s. 

A wedge is forming- A significant move will eventually arrive

Gold has been sitting close to the middle of its trading range since early August 2021, but a developing pattern could lead to a breakout to the upside sooner rather than later.  

While gold has made lower highs, it has been making higher lows since August 9, when a flash crash took the price to the $1675.90 level. Four reasons currently favor a break to the upside, including:

  • Rising inflation
  • Bullish price action in the commodities asset class
  • Growing debt levels and government spending
  • Inaction by central banks

When the Fed and other world central banks decide to take action, it could be too late, and gold could be off to the races on the upside again. 

Mining stocks tend to magnify the price action without time decay

For those bulls looking to position for a rally in gold, mining stocks could offer the best opportunities. Gold mining stocks usually outperform the metal during rallies and underperform when the price is correcting. Mining companies provide leverage without time decay. The leading mining companies and junior miners are doing quite well with gold above $1700 per ounce. Unlike many leveraged products, they do not suffer from time decay as they are ongoing businesses. 

The miners with the most substantial market caps can turbocharge gold’s performance on a percentage basis. The junior miners offer even more leverage as they explore for the metal. 

Gold rallied from a low of $1452.10 in March 2020 to a high of $2063 in August 2020, a 42% rise. The price then fell to a low of $1673.30 in March 2021, which was the 2021 low, 18.9% below the 2020 high. 

I favor the GDX and GDXJ on price dips for those looking to buy the yellow metal

The VanEck Gold miners ETF (GDX) holds shares in the leading gold mining companies. The top holdings include:

At $33.06 per share on October 20, GDX had $13.613 billion in assets under management. The ETF trades an average of around 23 million shares each day and charges a 0.51% management fee. 

The chart shows GDX rose from $16.18 in March 2020 to a high of $45.78 in August 2020 or 182.9%, as the ETF outperformed the percentage gains in the gold futures market. GDX fell to a low of $30.64 when gold reached its 2021 low in March, a decline of 33% as it underperformed the price action in the futures. Meanwhile, GDX fell to a lower low of $28.83 in late September even though gold made a higher low, making the ETF inexpensive. GDX was trading at the $33.06 level on October 20. 

The VanEck Junior Gold Miners ETF product (GDXJ) maintains a portfolio of junior mining companies that tend to be more volatile than the seniors. The top holdings include:

At $44.62 per share on October 20, GDXJ had $4.74 billion in assets under management. The ETF trades an average of over 5.86 million shares each day and charges a 0.52% management fee.

The chart shows GDXJ rose from $19.52 in March 2020 to a high of $65.95 in August 2020 or 237.9%, as the ETF outperformed the percentage gains in the gold futures market and the GDX ETF. GDX fell to a low of $43.24 when gold reached its 2021 low in March, a decline of 34.4% as it underperformed the price action in the futures and the GDX. Meanwhile, GDXJ fell to a lower low of $37.31 in late September even though gold made a higher low, making the ETF inexpensive. GDX was trading at the $44.63 level on October 19. 

I favor GDX and GDXJ because they are diversified ETFs, spreading the risk of holding individual companies using a portfolio approach. If gold is going to break out of its trading range to the upside, I expect GDX and GDXJ to outperform the metal and deliver golden results for precious metals bulls. Professor Summers believes inflation could get out of hand, and gold has a long history as a barometer of the economic condition.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.