Gold Miners ETF (GDX)

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Gold And Miners Oversold, with Strong Outlook
By: Adrian Day | February 26, 2021

Gold has seen its worst start to a year in three decades, breaking below its 200-day moving average, reportedly reacting to a higher dollar, higher Treasury yields and a switch from gold to Bitcoin. All this comes against a background of expectations of an economic rally as progress is made in COVID vaccinations.

It's Not So Bad

All this should be put in context. The gold price is only back to where it was in early July and remains up a healthy 18% over the past year. The widely touted dollar rally, after a drop at the end of the week, has the dollar recovering less than one-fifthof the decline since Biden was elected president. Some recovery! As for the move in interest rates, there has been a steepening in the yield curve. After a move up, the yield on one-year Treasuries is back to record lows, while yields at the long end have indeed moved up, to 1.3% on a 10-year. Some return! And, of course, real yields, after inflation, remain negative. Yields are up with inflation expectations, and that is also positive for gold.

As for Bitcoin, there is no doubt it has soared on the back of strong inflows, nor that there have been outflows from gold exchange-traded funds (ETFs), but the extent to which these are related rather than coincident is not clear. Other than a few high-profile instances, there is no evidence of a mass move out of gold to cryptocurrencies.

At the same time, the central factor that drives gold, global liquidity, remains very strong, with no indication of a reversal in the foreseeable future—quite the opposite! I think we are simply seeing normal market action. After an incredibly strong move in the first half of last year—40% from the March low to early August—gold is simply taking time to consolidate. I venture that we are very close to the low and gold will resume its recovery, which started at the end of 2015, very shortly. It had simply moved too far, too soon, and needed time to consolidate.

Silver Has Diverse Drivers

Silver, which initially fell with gold after the early-August peak—it was up an astonishing 143% in just over four months--soon reversed and started to move back up, well before the Reddit-inspired squeeze. It is up a very respectable 24% since its late September low, and there is a lot more to come. Silver has several things going for it:

• It is a monetary metal, responding, just as does gold, to excess global liquidity;
• It tends to respond even more than gold to inflation;
• It is an industrial metal, and will benefit from an economic recovery;
• It is a "green metal," with growing demand in solar panels, nuclear and batteries;
• Finally, there is a genuine shortage of the metal, with low stockpiles.

In a widely reported move, the largest silver ETF, the iShares Silver Trust, updated its prospectus to state that it may suspend or restrict the issuance of shares since it may be unable to acquire enough of the metal.

The mining stocks have mostly followed the metals, with gold stocks down sharply, the XAU down 12% from its early January high, and that number is distorted since Freeport-McMoRan Inc. (FCX:NYSE), which has rallied strongly this year, is a leading component of the index. Many leading gold stocks are back to early April levels—quite astonishing given the higher gold price since then, and the strong profits being reported. There is no clearer example of the disconnect than Barrick Gold, the second-largest gold miner in the world, and on our list of current holdings...

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