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Gold Miners Leading Action in Gold Market

Barchart - Mon Apr 18, 2022

Gold was the first commodity to move to a record peak in 2020 after unprecedented central bank liquidity and government stimulus lit a bullish fuse under the metal. Low interest rates, quantitative easing pushing rates lower further out along the yield curve, and government programs to stimulate the economy were inflationary seeds that began spouting in early 2020 and are in full bloom in 2022. Last week, the latest March consumer and producer price index data came in at 8.5% and 11.2%, respectively, the highest level since the early 1980s. Inflation erodes money’s purchasing power, supporting gold, the world’s oldest means of exchange. 

Russia’s invasion of Ukraine poured fuel on an inflationary fire. Russia is a leading commodity-producing country. Russia’s alliance with China, the world’s top commodity consumer, is fueling rallies in everything from energy to grain to metals markets. Gold’s latest high came on the back of the first war in Europe since WW II.

Gold mining shares tend to outperform the metal’s price on the upside and underperform on the downside as miners are leveraged to the price action. The VanEck Gold Miners ETF product (GDX) owns a portfolio of the leading gold mining companies. 


Gold consolidates after the most recent high

While the continuous COMEX futures contract rose to $2073 on March 8, June futures reached $2082 per ounce. 

The chart highlights gold’s ascent and correction. Since mid-March, the precious metal had traded from $1893.20 and $1985.80 but moved to the $2000 level on April 18, not far off the recent high. Gold is digesting the new record high with the price consolidation. Since March 29, gold has made higher lows and higher highs. 

Russia makes a potentially very bullish move

Russia’s invasion of Ukraine and sanctions from the US, Europe, and other allies isolated the Russian economy. In preparation for the attack, Russia decreased its US dollar reserves and increased its holdings of euros and gold. Over the past years, Russia and China have been substantial buyers of the precious metal to build their reserves. Both are leading gold producers and have been accumulating domestic production, adding to reserves with occasional purchases on the international gold market. 

Economic sanctions led Russia to announce it is backing the Russian ruble with gold at a rate of 5000 rubles to one gram of gold. The move puts Russia back on the gold standard if the country honors the gold exchange rate. Moreover, if China follows its ally and backs the yuan with gold, it will create a significant change in the global financial system, threatening the US dollar’s reserve currency status and boosting gold’s profile and use as a means of exchange. A return to the gold standard in the current environment would be a highly bullish event for the precious metal. 

Three reasons gold will continue to make higher highs

As gold consolidated at just below the $2,000 per ounce level, three factors support a continuation of higher highs:

  • The bull market in gold began in 1999 at $252.50 per ounce. Over the past twenty-three years, gold has made higher lows and higher highs. The long-term trend remains higher, and technical analysis supports a continuation of the trend.
  • Inflation at the highest level in over four decades erodes fiat currency’s purchasing power. While governments can print legal tender to their heart’s content, they can only increase the gold supply by extracting more from the earth’s crust. Gold is a rare and precious metal that moves higher as fiat currency values decline.
  • Central banks, governments, and monetary authorities hold gold as a reserve asset, classifying it as a foreign exchange holding. The world’s governments validate gold’s role in the global financial system.

Markets reflect the economic and geopolitical landscapes, which are highly bullish for gold in April 2022. 

Newmont Mining (NEM) rises to new highs

Gold reached its all-time high on March 8 and corrected. Meanwhile, shares of Newmont Mining Corporation (NEM), one of the world’s top gold producers, continued to move higher over the past weeks, reaching a new record high on April 18. 

The chart shows NEM shares rose to an all-time peak of $86.25 on April 18 after closing last week at the $84.77 level. Gold may have corrected from the early March high, but the bullish price action in one of the world’s leading gold mining companies continued to take the shares higher in a sign for the metal. 

GDX is a diversified ETF product

NEM is the top holding of the VanEck Gold Miners ETF product (GDX). The top ten companies in GDX’s portfolio include:

The chart shows that GDX holds nearly 15.5% of its over $12.3 billion in assets in NEM shares. GDX is a highly liquid product with over 20.5 million shares changing hands each day. The ETF charges a 0.51% management fee. 

While the stock market has been rocky in 2022, gold and gold mining shares have moved higher. June gold futures at $2,000 per ounce on April 18 were 9.09% higher than on December 31, 2021, when they settled at $1833.40. 

The GDX ETF moved from $32.03 at the end of last year to $41.53 per share on April 14, a 29.66% rise. GDX has performed like a leveraged ETF product for the gold market as miners create leverage. If gold corrects to the downside, the ETF will likely underperform the metal on the downside on a percentage basis. 

Meanwhile, most leveraged ETF and ETN products suffer from time decay, which is not the case with GDX. The world’s top mining companies are not going out of business anytime soon. 

Gold’s bullish trend remains intact in April 2022 and looks set to reach higher highs. GDX is a diversified approach to turbocharging gold’s performance as the holdings include the world’s premier producers, including Newmont Mining. 

 

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