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Gold Stocks Gain as Wall St Slides

May 3rd, 2016 by

The three benchmark U.S. stock indices were each down over 1% early on Tuesday morning; meanwhile precious metals have outperformed virtually every other asset class year-to-date (YTD). This has led many investors to pour funds into gold stocks. In general, “gold stocks” broadly include the popular exchange-traded funds (ETFs) backed by precious metals as well as other equities that bear some connection to the precious metals market at large, like mining stocks.

Rally for Gold Stocks Continues

rallyIn addition to greater safe haven demand for physical gold, investors have also been able to find impressive gains from the various gold stocks. For example, the world’s top gold miner, Barrick Gold (ABX), has seen its share price rise by more than 100% since the beginning of the year. The same 100%+ YTD gains are true for other miners like Sibanye Gold (SBGL), Pan American Silver (PAAS), and IAMGOLD (IAG). This not only signals a significant turnaround for the gold mining sector but also has made investors very happy.

The chart below tells the story: Thus far this year, three of the top four performers among all asset classes traded in futures are silver, gold, and platinum. (They are all sandwiched in between soybeans, interestingly enough.)

GDPnow-Q1-2016Why the solid returns from gold and equities tied to gold? Simply enough, the signs from the global economy haven’t been good no matter where you look. Deflation continues to be a problem in Japan, Germany, the rest of Europe, and even the U.S.—where first-quarter GDP grew by a meager 0.1%. As tthe chart above shows, GDP estimates for Q1 plummeted over time as it became clear that economic conditions were not nearly as good as once thought. At the same time, debt and slowing growth continue to hinder China’s prospects. All of these troubling trends point toward gold as the preferred safe haven asset.

Gold-and-Silver-BarsThe various equities tied to precious metals have also been one of the big beneficiaries of these underlying price gains. According to well-known gold analyst Jordan Roy-Byrne, “gold stocks are only three months removed from what could be the greatest buying opportunity of all time in the sector! While this is a sensational statement, it is rooted in data and facts.”

Many experts are in agreement that there is even more upside potential for these equities. Yesterday saw biggest single-day inflow into the SPDR Gold Trust ETF (GLD) since February, with over 20 metric tonnes added to the flagship gold-backed ETF; these surges bring total holdings in gold ETFs to levels not seen since January 2013.

Cause for Caution

gold-eggNot everyone is in such vehement agreement, though. One word of caution is that the various equities tracking the precious metals are trading at very high valuations right now. That could indicate that the risk of traders taking profits off the table (thereby lowering prices) could be high. This provides a reasonable argument for believing that any capital invested in gold stocks ought to be “redeployed” into safer assets like physical bullion. No matter the case, holding physical precious metals is always a great way to provide diversity to a balanced portfolio.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.