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Gold Commodity, Gold Stocks or Both?

For the better part of the past decade, gold and gold stocks have underperformed. After many years of lackluster performances Gold is beginning to regain its shine. The question then becomes should investors buy the precious metal, gold mining stocks or both? We believe there is no right or wrong answer to this question. Rather, it depends on what you are trying to accomplish.


For those looking for a long-term investment to help diversify their investment portfolio then it does make sense to own the gold bullion. Gold is basically a “store of value.” It is a physical asset that maintains its value without depreciating. Gold, precious metals, real estate, and fine art have shelf lives that are perpetual. That is, they do not perish nor do not decay. Although the relative value of these hard assets will fluctuate, they are expected to retain their value and have proven to be consistent in almost any market scenario over the long-term. On the downside, Gold bullion pays no dividend. However, it tends to outperform during times of macro and geopolitical uncertainties such as financial crisis, deflation, credit debacle and tail risk event. For this reason, global asset managers that manage multiple asset classes across the globe will hedge their investment portfolios with the Gold commodity.


Gold stocks have fared even worse than the price of Gold during the past decade. The reason is Gold mining stocks are far more volatile than Gold bullion. Investing in the Gold Miners is basically a bet on a sustained rally in the underlining Gold commodity. If the bullion continues to rally higher it is reasonable to expect Gold Mining stocks to begin to catch up to the bullion and possibly outperform over the longer-term. Although gold stocks and Gold Mining ETFs tend to follow the gold price trend, they do, however, offer some diversification. Gold mining stocks have much lower betas to equities (i.e., SPX). Gold bullion, on the other hand, tends to have a negative beta to stocks (i.e., SPX) and hence a good hedge. Gold mining stocks have positive betas, but they are often much lower than non-Gold Mining stocks. Investors can buy Gold Mining stocks to possibly diversify their equity-based portfolios.


Enclosed below are technical views on the popular SPDR Gold Shares ETF (GLD) and VanEck Vectors Gold Miners ETF (GDX):


SPDR Gold Shares ETF (GLD):


A large 6-year technical base breakout during Jun 2019 above 129-129.5 has led to a strong rally that is now approaching key resistance along 153.11 coinciding with the pivotal 61.8% retracement from its 2011-2015 decline. A convincing move above this key resistance reaffirms the intermediate-term recovery and extends the GLD rally toward 162-163 (near-term), 174 (Feb/Oct 2012 highs, medium-term), and then 185.85 (Sep 2011 highs, intermediate-term). Key support rises to its 10-wk ma (145), and below this to its 30-wk ma (142). The Nov 2019 reaction low at 136.19 remains medium-term support and then 128-130 corresponding to the Sep 2018 uptrend and the extension of the Jun 2019 breakout. GLD relative strength has broken out above a 6-year downtrend channel last year. The ability to maintain this breakout on pullbacks suggests the start of an outperformance cycle. MACD price momentum indicator has also broken out above an 8-year downtrend. This hint of an improving momentum trend that may lead to a retest of its 2011 highs.


VanEck Vectors Gold Miners ETF (GDX):


Gold Mining stocks as represented by GDX has been in technical base for the past 7-years. A convincing move above 31.06-31.64 (2016 highs and 38.2% retracement from 2011 to 2015 decline) confirms an ascending triangle breakout and suggests next targets to 33-34 (near-term), 37-37.5 (medium-term), 43.5-45 (intermediate-term), and 51-53/60.5-63 (long-term). Key initial supports are 26-27, 23-24, and then 20-20.5. GDX relative strength remains in a 7-year basing effort. A breakout above the downtrend will confirm the start of an outperformance cycle. MACD price momentum indicator has been trending higher and this bodes well for an impending GDX price breakout.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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