Monetary policy is changing, and it’s fueling a monster rally in gold-mining stocks.
The Market Vectors Gold Miners ETF (GDX) has gained 18 percent since the beginning of June. That puts it on pace for the biggest monthly gain since April 2016.
“Uncertainties about [the economy] have increased,” Jerome Powell’s Federal Reserve declared in its policy statement last week. We will “act as appropriate to sustain the expansion.” That meant one thing to the market: Expect an interest-rate cut at the next meeting on July 31.
As a result, the U.S. dollar crumbled against other currencies. That’s generally good for gold because precious metals are expressed as a simple ratio over the dollar. A weaker greenback, by definition, makes gold worth more.
Other forces seem to be positive for gold and gold miners. Geopolitically, President Trump has kept a hard line again China, demanding a trade deal from Beijing as soon as this weekend’s G20 meeting. Tensions with Iran and even Russia have also increased.
Economic Slowdown at Hand?
Meanwhile, the economic data could be weakening. Forward-looking industrial reports from the Fed’s New York and Philadelphia branches missed estimates last week as new orders slowed. Rail traffic continues to decelerate from last year and the housing market has yet to show signs of life — despite lower interest rates.
Aside from worries of a slowdown, analysts also think that higher tariffs will cause earnings for S&P 500 companies to drop. That’s the verdict from number cruncher Factset ahead of second-quarter results next month.
While a bad economy is bad for stocks, it can be good for gold because no one expects a metal to generate profits or grow. Investors view it as a safe haven or store of value apart from the business cycle.
As an interesting side note, Bitcoin (BTCUSD) also broke out to new 52-week highs after last week’s Fed meeting. While it’s a very different asset than old-fashioned gold, both are viewed as alternates to fiat currency.
Charts Turn Higher
The recent move in GDX came as gold futures (@GC) apparently completed a six-year basing pattern. As the chart above shows, @GC made successively lower lows between 2013 and late 2015. Then a series of higher lows completed the right side of the basing pattern. Now it’s trying to break the $1,400 level at the top of the range.
Remember, GDX holds shares in gold-mining companies and not the actual metal. Still, the two generally track each other closely.
Here’s a breakdown of the five biggest holdings in the fund:
- Newmont Goldcorp (NEM): The world’s biggest gold miner and the only member of the industry in the S&P 500.
- Barrick Gold (GOLD): The No. 2. miner would probably be in the S&P 500 if it weren’t based in Canada.
- Newcrest Mining: An Australian company that doesn’t trade in the U.S.
- Franco-Nevada (FNV): The Toronto-based firm collects royalties on other people’s gold with a process known as “streaming.” It’s a way to profit from gold without owning mines.
- Agnico Eagle Mines (AEM): Another Canadian company with operations in North America and Finland.
Precious metals are interesting because exchange-traded funds are often much more active and liquid than the underlying companies. That’s a big difference from industries like technology, where names like Apple (AAPL) and Facebook (FB) trade more than their overarching funds.
Other ETFs related to precious metals include:
- SPDR Gold Trust (GLD): This security directly tracks physical gold. One share represents about one-tenth of an ounce.
- Market Vectors Junior Gold Miners (GDXJ): This fund holds smaller companies that may be considered takeover targets.
- iShares Silver Trust (SLV): The white metal has a historical relationship with the yellow metal.
This post is part of our regular “ETF of the week” series. It focuses on exchange-traded funds with interesting news or price changes.
