gold mining stocks seem very unloved at the moment. As measured by the NYSE Arca Gold Miners Index, gold stocks fell 18.5% year-to-date through the end of July, underperforming both the underlying metal and the S&P 500. Since the index’s recent high set in August 2020, gold miners are down about 42.5%, putting them deep in bear territory.
When an asset class is so overlooked by investors, I think now is the time for naysayers to consider moving on.
The investment case is about more than market timing. Systemic risks abound at the moment which, in my view, could favor allocations to physical gold and gold mining stocks. These risks include sustained inflation, a potential global recession, an impending food and energy crisis and an escalation of hostilities in Eastern Europe.
Controlling inflation will not be easy. The historic jump in consumer prices likely lasted for years due to rampant money printing by central banks around the world, coupled with significant supply chain disruptions resulting from pandemic-related lockdowns. In addition to aggressive rate hikes, austerity may need to be implemented to reduce demand.
It’s worth pointing out that the last time we saw inflation this high was in the early 1980s. This prompted equally aggressive action by then-Federal Reserve Chairman Paul Volcker. , which raised rates to 19%. Gold responded by climbing to $835 an ounce, or more than $3,000 in today’s dollars, an all-time high after adjusting for inflation.
As I have shown you many times before, gold often shares an inverse relationship with real rates. When inflation-adjusted rates turned negative, the precious metal tended to trade higher as investors dumped government bonds in favor of gold and other durable assets.
Today, real interest rates are as negative as they were in 1980, but so far the price of gold has remained below $1,800, some distance from its nominal high. of $2,073 per ounce, set in August 2020, and its inflation-adjusted peak of around $3,000.
The strong dollar contains gold
The reason I believe we haven’t seen gold hit a new all-time high this year in light of systemic risks is the strength of the US dollar against other global currencies. Like most other commodities, the price of gold is in dollars, so when the value of the greenback is high, it has the effect of containing the price of the metal.
From the beginning of the year until the end of July, the only major currencies that have increased in value against the dollar are the Russian ruble and the Brazilian real. Most currencies lost value, with the Turkish lira losing just over a quarter of its value against the greenback.
Here are the results. As dollar-denominated gold remained stuck in a tight range, the price of gold in Turkish lira surged. Over the past three years to the end of July, the price of gold in Turkey has quadrupled and is currently trading near an all-time high, underscoring the metal’s perceived role as a hedge against currency depreciation.
A game against the tide
As for precious metal miners, I see them as an interesting opportunity right now. They’re trading at a huge discount to the broader stock market, and dividend yields are the highest they’ve been in nearly a decade.
What I think could benefit miners is a potential pivot from Jerome Powell and the Fed. We are currently in a tightening cycle, with another rate hike of 50 to 75 basis points expected in September. But once the central bank is convinced that inflation is under control, policy can quickly become accommodative again to avoid an even deeper economic slowdown. For an industry as capital-intensive and heavily indebted as mining, that would be good news.
US Global Investors is pleased to offer two funds that give investors exposure to the precious metals mining industry. The Gold and Precious Metals Fund (USERX) focuses on senior growers who are actively extracting gold and other valuable minerals from the ground. The Global Precious Minerals Fund (UNWPX), meanwhile, giving investors increased exposure to junior and mid-tier companies for additional growth potential.
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Originally published by US Global Investors on August 10, 2022.
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Please carefully consider a fund’s investment objectives, risks, charges and expenses. For this and other important information, get a fund prospectus visiting usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. US Global Investors is the investment advisor.
Gold, precious metals and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to their concentration on a single theme. The prices of gold, precious metals and precious minerals are subject to significant price fluctuations over short periods of time and can be affected by unforeseen international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.
The NYSE Arca Gold Miners Index is a rules-based index designed to measure the performance of large capitalization companies in the gold mining industry. The dividend yield is a financial ratio that tells you what percentage of a company’s stock price it pays out in dividends each year. A basis point is one hundredth of 1 percentage point.
Investors cannot invest directly in an index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.