Gold Opportunity

Gold Opportunity

Gold and miners’ equities are troubled by selling pressure in the bond market which are leading to rising U.S. government bond yields but nevertheless investors shouldn’t be dismissing exchange traded funds. Global central banks have set the stage for more upside for bullion prices which means that the current dip in gold prices and miners could prove to be a buying opportunity.

It’s not all about bonds. The dollar has been on a rampage with the USDX at the highest for nearly a year. Late last year you would have struggled to find a dollar bull and so universal was the dislike that the short dollar trade was arguably the most crowded.
The Outlook is still good for bullion, SGDM which is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. Stock fundamentals like cost deflation across the mining industry, share valuations below the long-term average, and rising M&A are all supportive of the miners’ space as well.

The spot gold price is still below historical all-time highs when adjusted for inflation, and the precious metal has historically outperformed during periods of high inflation. The price gains have been supported by strong growth in global investment that partially offset weakness elsewhere amid ongoing Covid-19 disruptions. Additionally, the lower demand for jewellery has shown signs of recovery, which may add another layer of demand ahead.

Furthermore, will the Federal Reserve’s monetary policy affect ongoing gold demand. Real interest rates have historically created an accommodative environment for gold bullion. Gold returns during periods of negative real rates have been double their historic average. The market has inflicted the largest amount of damage on the greatest number of participants and the short covering rally in the dollar has piled pain on top of misery for gold bugs.

Nevertheless, is gold still attractive as the bond selloff looks overdone. Government bond yields have been rising steadily for the past 3 months, but they went parabolic in February, surging over 31%. The yield on the 10-year Treasury touched 1.6% last Thursday, up from 0.9% just a couple of months ago. That’s more than a two standard deviation move, suggesting the bond selloff may be overdone. Remember, bond yields rise as prices fall. Yields have jumped so much, in fact, that they’re giving stocks a serious run for their money. The 10-year yield is now higher than the S&P 500 dividend yield, which may have added to the selling pressure that cost stocks close to 2.5% on Thursday.

It’s important to recognize the reasons why yields are rising. As expectations of a strong economic recovery mount, assisted by trillions in fiscal stimulus, loose monetary policy forever and hopes of herd immunity by summer, so do expectations for higher inflation. Prices for a lot of assets are far from “soft” and likely to continue rising as more and more liquidity is pumped into the economy.

Indeed. Interest rates were slashed to near-zero last April, and since then commodities have increased about 45%, as measured by the Bloomberg Commodities Index. But they’re not done yet. We are just one big infrastructure spending package away from a full-blown commodities super cycle. Gold participated in the rally, hitting a new high in August, but since then it’s been stuck in a downtrend. The metal, which has the highest weighting in the commodities index at more than 13%, is being clobbered right now by rising yields. On Friday it fell further to an eight-month low.

When it comes to trading gold, it’s important for investors to pay attention to not so much nominal yields but real yields. Right now, the 10-year bond is trading with a yield of 1.4%, which is the exact same rate that consumer prices rose at in January year-over-year, according to the Bureau of Labour Statistics. So, in reality, inflation is eating your lunch even with the yield increase.

It's expected that gold catches a bid when consumer prices really start to turn up on additional stimulus. Until then, it is now an attractive time to buy.

Furthermore, are we not gaining anything by leaving our money in the bank. The average yield for a personal savings account fell to a new all-time low in February, according to an index by Deposit Accounts. 0.49%, which doesn’t come anywhere close to matching inflation, to say nothing of beating it.

Low interest rates tell only a part of the story of why this is happening. The other part is that Americans are squirreling away their money like never before, putting pressure on savings account yields. At the end of 2020, U.S. banks held a record $17.8 trillion in deposits, up significantly from $14.5 trillion a year earlier, as people were stuck at home with fresh $1,200 stimulus checks.

On the plus side, when everyone gets vaccinated and the pandemic ends, these massive savings will be unleashed on the economy as people get back to their pre-pandemic lives, book vacations, send their kids to college and more.

Last checked, $17.8 trillion (the amount held in banks) is a bigger sum than $1.9 trillion (the size of President Joe Biden’s relief bill, which the House approved Friday evening). All of that pent-up capital is just waiting to be put into use, which is highly positive going forward. We’re well on our way to vaccinating everyone, but there’s still a long road ahead of us. Millions of doses have been administered and yet only 6.5% of the U.S. population has been fully vaccinated. Israel is the global leader with 37.8% of its population having gotten the vaccine.

Historically, gold is one of the premier inflation-fighting assets. Inflation fears are further reflected by a sharp rise in benchmark Treasury yields, which may be partially attributed to expectations for greater inflation.
While gold has historically served as a refuge during periods of extreme price inflation and deflation, the risk of extreme levels of price inflation currently remains low, according to State Street research.

Instead, investors should concentrate on the risk of monetary led inflation (originating from dovish policies and higher liquidity) leading to US dollar weakness and the potential benefits gold could offer in that environment.
It’s no secret that gold has been a major beneficiary during the coronavirus pandemic as a viable safe haven asset amid all the uncertainty in the capital markets. But investors don’t actually have to get pure-play gold exposure in order to reap the benefits of the precious metal, enter gold miners.

SGDM takes on added allure as an inflation-fighting tool.

Another type of inflation that gold investors should be tracking is monetary inflation. While closely linked to fiat currency devaluation, there is an important distinction to highlight as it relates to rising financial asset valuations. Central banks globally have continued to add debt to their balance sheets in response to the COVID-19 pandemic.

SGDM is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. Stock fundamentals like cost deflation across the mining industry, share valuations below the long-term average, and rising M&A are all supportive of the miner’s space as well. While gold serves as a strong store of value over time, its sensitivity to moderate price inflation has historically been more limited. In contrast, compared to other real assets such as infrastructure and natural resources, gold’s correlation, and more importantly its beta to monthly changes in CPI, is actually the lowest, concludes State Street.

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