Don’t Be Dazzled by Gold
New York (Sept 2) Investing in gold, like investing virtually anywhere these days, is trickier than usual. Uncertainty, which we’ve had plenty of, is a boon for gold, but that alone doesn’t make for a sustained price rally. Last week, a triple whammy of anxiety—Hurricane Harvey, North Korea’s missile test over Japan, and a weaker dollar—drove gold prices to an 11-month high of $1,326 per ounce.
Recently, gold has been rising when some news event sparks alarm, but then it falls nearly as quickly. RBC Capital Markets’ Christopher Louney, borrowing a Clinton campaign catchphrase that never quite landed, forecast a “trumped-up, trickle-down” price pattern for the yellow metal back in February, due to factors working both for and against gold. “Gold, as a perceived safe haven, rises when there is geopolitical or political uncertainty,” Louney says. “Then, there are the macroeconomic factors: the dollar, interest rates, and equity markets. Absent ever-increasing risk or uncertainty, gold stays at this level.” Gold is on the rise now, but Louney expects it to end the year at $1,253 per ounce.
Gold prices are historically robust in the fall, but Louney isn’t alone in forecasting lower prices. Sameer Samana, Wells Fargo global quantitative and technical strategist, expects gold to finish the year even lower than Louney predicts, somewhere in the $1,150 to $1,250 range, the midpoint of which is 10% below today’s prices, and he wouldn’t be surprised if prices fall further.
ETFs by Category
Gold can be a good long-term hedge, but for that you need exchange-traded funds that own the asset itself—notably SPDR Gold Trust (ticker: GLD) and iShares Gold Trust (IAU). Both are up 13% so far this year. Some investors may be eying gold miners, which typically do well when gold prices rise. The $8 billion VanEck Vectors Gold Miners (GDX) is up 16% year to date, while the $4 billion VanEck Vectors Junior Gold Miners (GDXJ), which tracks smaller gold miners, is up 11%. But these aren’t easy ETFs.
VANECK VECTORS Junior Gold Miners grappled with the burden of success this past spring, as a modern-day gold rush forced the ETF to park 5% of assets in its big brother. High inflows and significant overlap between the two ETFs meant the firm ran out of places to put the money, and was close to triggering a Canadian securities rule, which it averted by putting money in securities that weren’t in the index that it tracked.
VanEck changed the MVIS Global Junior Gold Miners index rules, and during its rebalancing in June added 21 mostly U.S., Canadian, Australian, and South African stocks. The fix made the portfolio more diversified, and the average market cap moved higher, to $1.6 billion. But this is a temporary fix. For starters, there’s still overlap with its sibling ETF. It also still tracks the same index as the leveraged Direxion Daily Junior Gold Miners Index Bull 3X (JNUG) and Direxion Daily Junior Gold Miners Index Bear 3X (JDST) ETFs, which exacerbated the problem the last time around. “If gold broke out again, lifting demand for small-cap gold-mining stocks, it’s only a matter of time before [capacity] becomes an issue,” Samana says. But it probably won’t be anytime soon.
Mining ETFs shouldn’t be considered a proxy for gold. The VanEck Gold Miners ETF fell 26% in 2008, when the SPDR Gold ETF was up nearly 5%. The VanEck Junior Gold Miners ETF launched in 2009, and has been more volatile than its older sibling. Don’t count on it as a haven.
BARRON'S
