More Gains for Gold Stocks

March 29th, 2016 by

“Gold stocks” typically refer to exchange-traded products backed by gold, but the term can also be taken in a broader sense to include gold miner ETFs and even shares of gold mining companies. Broadly, these various forms of “paper gold” are the stock markets’ way of giving equity investors exposure to gold.

The obvious drawback of these kinds of gold stocks is that they do not give the investor any physical gold! Nonetheless, their performance is closely linked to the price movements in the gold market, making gold stocks a decent proxy for evaluating technical trends and buyer sentiment.

Continued Strength for Gold Stocks

federal-reserveThe various paper gold options trended downward over the past week right along with the rest of the precious metals markets. This was due in no small measure to the litany of hawkish statements made by no less than five regional Federal Reserve Bank presidents: That’s just one member shy of half of the Fed governors! Each of these voting members of the Federal Reserve Open Market Committee (FOMC) indicated that they believed the central bank had a good case to continue to increase interest rates throughout the remainder of the year.

However, after Fed Chair Janet Yellen contradicted these opinions with extremely dovish rhetoric of her own on Tuesday, indicating a much more accommodative role for the Fed in the event that the economy weakens, the precious metal prices rebounded sharply. Gold stocks rose right along with them, with most miners (such as AU, GG, SBGL, HMY, EDV, CDE) gaining 6% to 7%. Naturally, gold mining ETFs like GDX and NUGT also did well, with the latter advancing over 16% during trading.

gold marketIt’s natural for traders to feel a bit reticent about this year’s strong gold rally given the previous 3 or 4 years of a stingy bear market, where several smaller rallies simply died. Nonetheless, careful restructuring and improved metal prices have helped miners see their fundamentals improve over the last year. On top of that, weaker local currencies in most gold-producing nations and cheaper energy costs due to the oil crash have boosted these company’s profit margins in 2016.

Similarly, inflows for gold ETFs continues to be their strongest since 2009—over $13 billion over 11 weeks. Moreover, the strongest drivers for the precious metals market right now aren’t likely to go away anytime soon: low and even negative real interest rates, and therefore weak currencies around the world; general global financial uncertainty; and ongoing political turmoil and violent conflicts that are fueling safe haven flight.

Technical Outlook

One important technical fundamental to keep in mind is that gold stocks have been holding above their 400-day moving average. This measure is important because it stretches back further than the 200-DMA (twice as far, obviously), taking into account a broader set of data that includes more dips and rallies in the gold price.

 

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.