More valuable than Gold!

RoboStreet – December 6, 2018

Money Makes a Move in Market Hedges 

The notion of the market completing what traders were hoping to label a “garden variety” correction was quashed this past Tuesday after the Dow skidded 800 points in a sharp sell-off tied to fears of slowing domestic and global growth. The trade war and the Fed’s dot plot plan, that will almost guarantee another rate hike in two weeks, are contributing as the real culprits of fear of slowing growth at a faster pace than what the economic data shows – of which most is backward looking which puts significant importance on the upcoming economic calendar.

While the markets were closed yesterday, the Fed released its monthly Beige Book report that lent credence to the rising slow growth fears. Within the text of the report was the language Most Districts reported that firms remained positive; however, optimism has waned in some as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labor market constraints. The inclusive verbiage “optimism has waned” is going to be the most quoted line of today’s reporting by the financial media.

As it would be, the market is going to revisit the lower end of the recent trading range presenting yet another test of the bull’s resolve, with Friday bringing a highly anticipated set of November employment data, which should continue to show strong gains and higher wages. Investors will also digest over the next week several other key reports on retail sales, industrial production, consumer sentiment, inflation, factory orders, service industry growth and business inventories – all of which will shape the trading landscape over the next couple of weeks.

One place investors are upping their exposure to is gold and specifically gold mining shares. Gold is a time-tested market hedge that attracts a lot of attention and money flow when there is calamity in the stock, bond and currency markets. Aside from investment grade bonds and Treasuries being a go-to sector, gold and gold stocks are getting solid inflows from worried investors around the globe. Given that the sector is down roughly 20% year-to-date, this trade looks pretty enticing both from a fundamental as well as a technical standpoint.

My favorite instrument of choice to play the gold market is the VanEck Gold Miners ETF (GDX),which seeks to replicate as closely as possible the price and yield performance of the NYSE Arca Gold Miners Index (GDMTR), which is intended to track the overall performance of companies involved in the gold mining industry. As currency manipulation abounds via central bank intervention, gold becomes a natural hedge against plunging currency valuations within emerging markets as well as developed markets – a.k.a. China, Europe, Japan.

The top ten holdings within this exchange-traded fund are the “who’s who” of the global gold mining industry, making up a little over 60% of the total holdings. Of these holdings 50.04% of the companies are Canadian, 16.59% Australian, 16.15% American, $5.68% South African, and the balance in the UK, Peru, China, Côte D’IVoire, and Egypt. Plus, shares of GDX trade like water, with an average daily volume of around 35 million shares. So, this is not a retail product. Institutions are the big traders and investors of GDX.

The case for owning GDX instead of the metal gold is pretty clear-cut. Back in the last big run-up for gold prices in 2016 when gold was trading at $1,062/oz and rallied to $1,365/oz where it peaked, that move totaled 28.5%. Conversely, during that same time frame, shares of GDX rallied from $13 to $32 for a total gain of 146% or 4.1 times higher than the returns on the precious metal itself.

In flat markets, shares of GDX tend to trade in line with gold prices, but when gold spikes, that is when owing mining shares wins hands down over owning the bullion itself, especially if one is trading the sector. Currently, shares of GDX are trading at $19.70 and are putting in what chartists call an ascending pennant formation that historically leads to a powerful upside breakout. From the chart below from our friends at Barchart.com, the pattern is shaping up for a textbook breakout in the not-too-distant future where a break above $21 puts a big fire under the stock.