As has been widely documented, gold is one of the assets benefiting the most from the coronavirus uncertainty hanging over equity markets, a theme that is providing a boost to miners ETFs such as the VanEck Vectors Gold Miners (NYSEArca: GDX).
GDX 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, but those fundamentals could be glossed over if the dollar strengthens.
Gold stocks and GDX slipped late last month, a scenario that history says isn’t altogether surprising, but the group bounced back last week. Importantly, history also says that recovery could be meaningful this time around.
“While the sell-off in gold stocks was painful, it is not unusual in the midst of a stock market panic. The last such example was the 2008 financial crisis crash,” said VanEck in a recent note. “Following the September 15, 2008 Lehman bankruptcy, gold declined just 10% before trending higher on October 27. Over the same period in 2008, the GDMNTR fell 48%, but by December 16 it had recovered to its pre-Lehman level in a classic V-shaped recovery.”
GDX Looking Strong
While gold markets were a bit more tepid after a robust January, falling off as stocks attempted a rally off of the worst weekly losses since the financial crisis, the shiny metal has had a resurgence over the last week, and some analysts see this as just the beginning, giving commodities and ETF metal investors a reason to celebrate.
“Any action the U.S. Federal Reserve (Fed) takes in response to a virus-weakened economy is likely to lack efficacy,” notes VanEck. “There are two aspects that make a coronavirus economy extremely difficult to stimulate. First, this is a deflationary shock with declines or stoppages in work, travel, leisure and other forms of economic activity. Second, it is likely to create shortages due to the interruption of global supply chains, which would normally be inflationary.”
As the coronavirus outbreak continues to be the wild card in the markets, the safe haven of precious metals is in high demand, especially for exchange-traded funds (ETFs) that are backed by gold. ETFs have been stockpiling gold as more coronavirus news continues to invade the financial markets. Plus, it’s hard to ignore the impact of falling rates on gold and miners.
“As markets gyrate, gold investors must not lose sight of the bigger picture. For over a year the primary driver of the gold price has been falling real rates,” said VanEck. “Through the coronavirus crash, ten-year treasury yields have plummeted to all-time lows. With the markets in disarray, gold has not responded to this fall in real rates. Once the volatility subsides, we expect real rates to again become a primary driver of gold prices.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
