Are Gold Investors Just as Jittery as the Rest? — Investing in Gold

Are Gold Investors Just as Jittery as the Rest? — Investing in Gold

This week, James Bond, Jesus’ birthplace, 70% of Chinese small and medium businesses, and HSBC’s research division in London, were all laid low by the coronavirus. Alongside stocks, of course.

We have seen the relief rallies that central bankers are supposed to trigger. But they don’t seem to stick anymore.

This is despite steady QE, rate cuts, cooperation and coordination from central banks, and everything else that used to work so well.

But that was last week’s topic. The bursting of the central bank bubble. Which turned out to be on the money.

Investing in Gold

Today I want to talk gold. And not just because it’s back near all-time highs in a long list of currencies.

I want to talk gold because it fell, at first.

Gold began last week at almost $1,690 — an eight-year high. And then it fell below $1,570 on Friday in an accelerated plunge.

Social media lit up with confused, angry, and panicked gold investors. What had gone wrong?

Isn’t gold supposed to be a hedge? Isn’t it supposed to go up during a crisis?

At that point, gold was still up substantially year-to-date. But that didn’t stop the anguish.

A week later — this week — and it turned out to be a storm in a teacup. Gold staged a comeback.

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What made it interesting is that the comeback happened despite stocks continuing to struggle. That’s a reversal of the previous weeks’ correlation where both fell.

On Tuesday we saw a drop in stocks and a rise in gold as the Fed’s rate cuts underwhelmed. And again on Wednesday, as other central banks added more stimulus.

But here’s the kicker. The US-listed gold stock ETF GDX surged 5% on Tuesday, while other stocks plunged. Not only is the gold price rising in the face of falling stock markets, but gold stocks are up too.

And they did it again on Thursday — GDX was up while the S&P 500 took a hit.

This chart shows the split, with GDX in blue and the S&P 500 in red:

Daily Reckoning Australia - ETF GDX - Gold Investors and Gold Stocks

Source: Yahoo Finance

[Click to open in a new window]

This is a whole new phase of the gold bull market. A phase where gold stocks can diverge from the rest of the stock market.

Why did they pull that off?

For a simple reason, if you ask me. Earnings season is drawing near. And gold companies must be raking it in thanks to the higher gold prices.

It’s tough to argue with earnings, even for gold sceptics.

Heck, dividend investors might even be buying gold stocks at this point.

Last week’s action was the test for gold investors…whether they’re too flappable and skittish for the volatility of a gold bull market, or whether short-term shocks would push them out of positions.

That sort of action is common at the beginning of any bull market. Bitcoin believers refer to it as ‘the halvening’ because bitcoin price crashes make gold and gold stocks look boring by comparison.

The next phase of the bull market will feature gold stocks instead of just the precious metal, as the cash flow impact of the gold price begins to play out.

Remember, once the gold price is above a company’s cost of production, each increase in the price translates to profit. That’s a form of leverage to the gold price for investors.

But back to what we started with — the gold shakeout last week.

There’s a great deal of irony in what happened. Gold investors are supposed to be long term, patient, and unaffected by short-term volatility. They should be aware of gold’s odd price structure. That the price is set in the futures market amongst the speculators, in the short term.

In other words, those who panicked last week should’ve known better. But many didn’t. And they’re likely to be tested again.

Of course, the key question in all this remains whether the gold price will continue to rise. But one event on Thursday suggested it will. My colleague here in London calls it the Golden Doughnut.

TIPS securities are loans to the US government that pay an inflation-adjusted return. The yield on 30-year TIPS went to 0 on Thursday, suggesting that, adjusted for inflation, you will not make any money by lending to the US government.

That is the Golden Zero and it’s the first time it’s happened. Why golden?

The strongest argument against holding gold as an investment is that it doesn’t pay any interest. You’re better off in government bonds — a safe haven that does pay interest.

Well, with government bonds no longer paying any interest, adjusted for inflation, it appears as though you might as well own gold. And that’s where the demand for gold will likely come from…

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia

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