Gold surged on Tuesday, rising $49, to $1,638 an ounce, and there could be further gains as more investors view the precious metal as insurance against financial market instability at a time of ultralow interest rates.
Gold got a lift from the Federal Reserve’s surprise move Tuesday to cut its key short-term rate by ½ percentage point, to a range of 1% to 1.25%. That has fed the continuing rally in the U.S. Treasury market with the 10-year note touching below 1% for the first time. Later on Tuesday, the 10-year was yielding 1.01%.
Lower rates benefit gold by reducing the appeal of holding cash versus gold, which yields nothing. There are more than $14 trillion of negative-yielding debt in the world, mostly in Europe.Gold has recently broken out of a trading range and is now nearing its high last week of $1,659 an ounce. The metal peaked at $1,900 an ounce in 2011.
“The flows into gold are just getting started,” says Peter Grosskopf, chief executive of Sprott, a Toronto asset manager focused on precious metals. “Gold is now being seen as mandatory portfolio insurance and not a fringe asset. It has a long way to gain on fiat currencies” like the dollar that aren’t backed by anything tangible.
Grosskopf says ownership of gold among institutional and retail investors remains low with few having Sprott’s recommended asset allocation of 5%. “The rally has not attracted retail investors,” he says.
Gold stocks were among the strongest groups in a weak stock market Tuesday as they lived up to their historic hedging role. The Van Eck Gold Miners ETF (ticker: GDX) is up $1.38, or 5%, to $28.67 while the Van Eck Vectors Junior Gold Miners ETF (GDXJ) has risen $1.33, or 3.5%, to $39.43. Industry leader Newmont (NEM) has gained $2.78 to $49.61, a 6% increase, while Barrick Gold (GOLD) is up 69 cents, or 3.4%, to $20.52. The Dow Jones Industrial Average has fallen 631 points to 26,071.
Sprott operates gold-related mutual funds and exchange-traded funds, including the $900 million Sprott Gold Equity Investor (SGDLX) mutual fund (formerly the Tocqueville Gold Fund). Reflecting the disfavor of gold, the Tocqueville fund peaked with $5 billion in assets. There aren’t many precious metals open-end mutual funds with the largest, Fidelity Select Gold Portfolio (FSAGX) totaling just $1.6 billion. The GDX ETF totals $12 billion.
The entire market value of gold stocks globally is estimated at around $280 billion. There are an estimated 6 billion ounces of gold in the world about $10 trillion. New supply from mines total about 92 million ounces a year, or about 1.5% of aboveground stocks, according to CPM Group. There has been little change in mine supply recent years, reflecting political resistance to new mines and environmental issues.
Grosskopf says the growing demand and chart patterns point to gold hitting $2,000 an ounce. He argues that the Fed’s rate action failed to lift stocks Tuesday because financial markets have entered a “vicious cycle.” Rate cuts have less and less impact in a debt-laden economy when the government is running trillion-dollar annual deficits, he argues.
Grosskopf wonders why more European investors don’t own more gold given negative rates in much of Western Europe.
“I have no idea why a wealthy Italian investor would have money in the European banking system,” he says. “It should be in gold.”
Grosskopf says that while funds have moved into the large-cap gold stocks like Barrick and Newmont, small-cap issues remain depressed. Barrick is benefiting from improved financial performance and focus under CEO Mark Bristow, the former leader at Randgold, which merged with Barrick in early 2019.
One of the benefits of gold stocks in a rising market is their leverage to higher gold prices. Production costs are relatively steady regardless of the gold price. Newmont sees $1.6 billion of annual free cash flow, a roughly 4% free cash flow yield, at $1,600 gold. Each $100 move in the metal translating into a $400 million swing in profits, it has projected.
Barron's - By Andrew Bary - March 3, 2020 4:21 pm ET