The Case For Gold and Gold-Related Stocks
Central banks hold fiat currencies as reserves. The legal tender’s value derives from the full faith and credit of the governments that issue the money. The oldest form dating back thousands of years is gold when it comes to foreign exchange. The bible has over 400 references to this precious metal. Gold is the world’s most durable form of money that transcends borders. Governments worldwide classify gold as a foreign exchange reserve, validating its role in the global financial market.
In 1999, gold fell to a bottom at $292.50 per ounce when the United Kingdom sold one-half of its holdings in an auction. Ironically, the UK is the home of the international gold market, and the government dismissed gold as a barbarous relic of yesteryear. Since then, gold has made high lows and higher highs, leading to the most recent peak at over $2,070 per ounce in March 2022.
Over the past years, central banks and governments have been net buyers of gold, adding to their reserves. China and Russia, two of the world’s leading gold-producing countries, have purchased annual output and even bought the metal on the international market. In 2022, gold’s role in the financial system is rising. Central banks and governments can print fiat legal tender to their heart’s content, but the only way to increase the gold stock is to extract more from the earth’s crust.
Gold mining companies tend to provide leveraged exposure to the metal as they invest substantial capital to produce gold. The leading gold mining shares often outperform gold when the price appreciates and underperforms when it corrects to the downside.
Gold has been in a bullish trend for twenty-two years
- Gold reached a bottom in 1999 at $252.50 per ounce.
- The precious metal has made higher lows and higher highs over the past twenty-three years.
- Central banks and governments validate gold’s role in the global financial system as they hold the metal as an integral part of their foreign currency reserves.
Gold made a new high in March
- Gold first eclipsed $2000 per ounce in August 2020.
- The precious metal consolidated and digested the new high from August 2020 through February 2022.
- In March 2022, gold rose to a marginal new record peak at over $2070 per ounce.
The reasons why the rally should continue
- Gold is a hybrid asset, part currency, and part commodity.
- Gold volatility is lower than other commodities but higher than other currencies.
- Reason one- Inflation erodes fiat currencies’ purchasing power. Real interest rates remain in negative territory. Gold is an inflation barometer and store of value.
- Reason two- Central banks and governments can increase the money supply to their heart’s content. The only way to increase the gold supply is to extract more from the earth’s crust.
- Reason three- The war in Ukraine is also an economic battle between Russia-China and their allies and the US-Europe and their allies. Economic sanctions open a new role for gold as Russia has backed its ruble with gold, making 5,000 rubles exchangeable for one gram of gold. If China follows, gold’s role will rise in the global financial system.
- Reason four- The trend is your friend, and it is higher for gold.
Gold mining shares say gold is heading higher
- As of April 22, at the $1934.30 level, gold was 5.50% higher since the end of 2021.
- At $36.94 per share, the GDX senior gold mining ETF has risen 15.3% over the period.
- At $45.61 per share, the GDXJ junior gold mining ETF has moved 8.8% higher over the period.
- The rise of gold mining shares suggested that gold is heading to new all-time highs.
- Newmont Mining (NEM) is a leading world gold mining company. NEM shares rose to a new record high of $86.37 on April 18 before correcting but were still over 20% higher in 2022 at $74.52 per share on April 22.
Two ETF products that track senior and junior gold mining stocks- Diversification reduces risk
- GDX is a highly liquid ETF product that owns a portfolio of the leading senior gold mining companies’ shares.
- GDXJ is a highly liquid ETF product that owns a portfolio of the leading junior gold mining companies’ shares.
- Gold mining companies tend to provide leverage compared to the price of gold as they outperform on a percentage basis when gold rises and underperform when the gold price moves lower.
- GDX and GDXJ are diversified products that reduce idiosyncratic risks of holding individual companies such as company management, the location of specific mining properties, locational, and other risks.
Gold has been a mainstream asset for thousands of years. Uncertainty on the economic and geopolitical landscapes supports gold as it has a long track record as a store of value.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!