The past few weeks have been surprisingly painful for fans and followers of gold stocks. The SPDR Gold Shares Fund (NYSEARCA:GLD), an ETF that serves as a broad proxy for the overall gold market, has lost more than 6% of its value since peaking in March. Meanwhile, gold prices themselves have fallen nearly 8% for the same timeframe.
That’s a lot, by commodity standards.
It’s not so much the selloff that’s frustrated the gold bugs, though, as it is the lack of a reason for the selloff. If anything, against a backdrop of growing inflation and geopolitical uncertainty, safe-haven gold should be rising.
There may be an opportunity tucked away in the unlikely, inexplicable weakness in gold stocks.
For the record, gold’s recent action has vexed the professionals as much as it’s confused amateurs. CMC Markets analyst David Madden recently noted: “Historically gold has benefited from the flight-to-quality effect, but that hasn’t been the case in recent months. Lately, the inverse relationship between gold and the U.S. dollar has been strong, and that is the case today.”
Eugen Weinberg, head of commodity research for Commerzbank, agrees, explaining on Wednesday “We still cannot understand the response of the gold price in the current market environment of high risk aversion.”
The rising U.S. dollar certainly has to get some of the credit. In that gold is priced in U.S. dollars, when it gains in value, it pushes the value of the precious metal lower. And, the U.S. Dollar Index has rallied 6% since mid-April, in step with the reality that interest rates are poised to rise for a while in an effort to keep inflation in check.
The inversely-correlated moves, however, don’t quite line up as they historically have. Gold has been oddly bearish, in light of the factors that tend to work in favor of its value.
So what if gold wasn’t quite as un-ownable as a cursory look at a gold price chart would suggest? That may well be the case.
A Misunderstanding of Sorts
Adrian Ash, director of research at BullionVault, said, “I can understand why people might be puzzled by the move, if they think that gold should always go up in times of geopolitical tensions. But that’s a straw-man argument because that’s not how gold works. Gold is really there for investors to act as financial insurance.”
While the exact definition of “financial insurance” remains unclear, Ash’s point is well taken. Gold is a more complex commodity than most traders appreciate.
Equally telling is the fact that while gold prices have been taking on an unusual amount of water, gold stocks, and gold mining stocks in particular, haven’t suffered as they normally might when gold is fighting a losing battle.
The VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) and the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDX) are both only down about 5% for the period that took a 6% toll on GLD. Normally, they rise and fall in step with gold prices, but to a far greater degree.
It may be a tacit sign that traders don’t really think gold is headed off of a cliff.
If those traders are right (and the crowd often is), gold’s meltdown may well be a chance to scoop up some bargains.
Gold Stocks to Buy
Though most gold miners more or less do the same thing, enjoy the same tailwinds and face the same headwinds, they’re not all necessarily the same. Some are better than others.
To that end, investors that believe the gold selloff is over-exaggerated and that gold is ripe for a reversal may want to take a closer look at IAMGOLD Corp (NYSE:IAG) or Newmont Mining Corp (NYSE:NEM).
The former is an often-overlooked IAMGOLD Canadian miner that’s starting to impress more and more analysts, and Newmont Mining was recently pegged by Morgan Stanley as one of the bright spots in the industry. Analyst Piyush Sood touted its “stronger execution, steadier production profile, deeper and relatively de-risked project pipeline, better reserve life and lower leverage.”
Or, for investors seeking out something a little less adventurous, Goldcorp Inc. (USA) (NYSE:GG) is in the midst of a five-year plan that looks well beyond gold’s short-term price volatility.
That said, the mostly-unjustified selloff in gold itself has put several gold stocks into the spotlight as potential buys. A bunch of great “junior” miners are also on sale at bargain prices. Don’t overthink things and talk yourself out of a good trade.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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