Several catalysts have brought the price of gold down; here are a couple of ways to get in at discounted prices.
Goldcorp Inc. (GG)
From Adrian Day’s Global Analyst
Gold has had a difficult few months. After a modestly upward trend until mid-April, gold then started its downward trajectory, falling from $1,350 to well under the psychologically important $1,200 mark in a (final?) collapse the last week. The U.S. economy, stock market, and particularly dollar, have all been broadly positive for most of the year, making it a difficult environment for gold, with demand for the metal sliding; U.S. coin sales hit 10-year lows, reflective of this lack of demand).
But indifference has now turned to hostility, as, in the last couple of weeks, amid its currency crisis, Turkey is thought to have been a heavy seller of physical gold. It makes sense; after China and India, Turkey and Russia have been the largest buyers of physical since 2008, with a pick-up over the last three years. In a crisis, one sells liquid assets, all the more if the price has gone up in local currency terms (viz. Venezuela).
If this is the main cause of gold sharp decline in the last week or so, then it is of necessity a temporary phenomenon. The U.S. economy, stocks and the dollar may stay reasonably strong—for now at any rate—so gold won’t suddenly explode upwards, but we could reasonably expect a near-term return above $1,200 towards the mid-$1,200s. (On Friday, gold bounced $11 from its low of $1,174.)
Amid this gold decline and a collapse in sentiment, Vanguard decided to get out of the gold market. The largest precious metals fund by far—virtually twice the size of the next largest—is to change its name and mandate from the Precious Metals Fund to the Global Capital Cycles Fund; it has already replaced its London-based gold manager to a U.S. firm not known for any gold expertise or interest.
We suspect that the heavy volumes on many gold stocks reflect the new manager cleaning house, a typical phenomenon when a new manager takes over a fund. This has been going on since the new manager took over at the end of July, with the XAU index down from over 77 to under 66 this month. But in the last week, amid the drop in gold, this decline changed to a cascade, with some big-cap miners seeing one-day declines of 5%-9% on heavy volume.
Vanguard shunning gold at this point may prove to be a contrary indicator of historical proportions. Again, if this is the explanation for much of the gold selling, then it too is a temporary phenomenon, and we can equally expect a bounce in the gold stocks once the selling precious is off. (The XAU moved from 64.29 to 65.92 on Friday.)
Amid all this, sentiment has turned extremely negative, as evidenced by the latest CFTC, showing speculators went net short for the first time since the end of 2001. At that time, gold was $275 an ounce and within a year was at $348, within six years at $900. Peter Boockvar of Bleakley Advisory Group, to whom acknowledgements for pointing out the data, comments “it’s tough to find a more contrarian indicator.”
This, plus the largest gold fund changing its mandate, is as close to capitulation as one can get. The short-term recovery could be as sharp as the decline, once the selling pressure is gone. This gives us the opportunity to buy great companies on sale, as well as to make some short-term trades is grossly oversold stocks.
Depending on your circumstances, you could buy Goldcorp Inc. (GG), wait a month, and sell an original position if you have a tax loss. (Be alert to which lot you sell, particularly if you obtained Goldcorp from its acquisition of Virginia Gold’s Eleonore Mine. Or sell puts: the September 11 on Goldcorp would generate 55 cents premium; the September 80 on RGLD, 3.25. For call buyers, the January 85 on RGLD is $2.50; the January 12 on GG 45 cents; the January 20 on WPM 65 cents. If you decide to buy or sell options, obviously you would need to compare different strike prices and dates at the same you go to place a trade.
Adrian Day, Adrian Day’s Global Analyst, www.adriandayglobalanalyst.com, 410-224-8885, August 19, 2018