With the Federal Reserve seemingly winding down its cycle of interest rate increases, a stronger dollar is no longer the big currency market story.
Gold is. Gold is back.
And for at least the next 3 to 6 months.
The likely political chaos in Washington over raising the U.S. debt ceiling–and the potential for real brinkmanship between an intransigent Republican House and the Biden White House–is likely to keep money flowing into gold until at least June. That’s when Treasury Secretary Janet Yellen told Congress that the Treasury Department will run out of gimmicks that allow it to keep paying the government’s bills. If past experience is any guide, Treasury’s June deadline will turn into July or August, but there’s no doubt that at some point this summer the Federal government will run out of borrowing capacity.
And global financial markets aren’t likely to look favorably on the prospects of a U.S. default. (Hint: that wouldn’t be good for the dollar.)
If inflation does prove to be stubbornly resistant and stays well north of the Fed’s 2% target rate, then that gives gold another boost.
And then, of course, there’s the relationship between gold and interest rates. Gold doesn’t like high interest rates since while gold may be a store of value, gold and gold stocks (by and large) don’t pay any dividends. They lose in any competition with bonds as income vehicles.
Today, January 30, gold traded on the Comex at $1938 an ounce for April delivery. It’s easy for me to see a rally to 2000 an ounce for gold. That’s a rough 3.2% gain from here. At that level, we’re likely to see some of the standard “big number” resistance. Beyond $2000 an ounce, any gains will depend, in my opinion, on exactly how scary any debt-ceiling crisis might get.
A 3.2% gain doesn’t seem like much but remember that you’re also getting significant diversification from gold since the metal is likely to climb on the kind of bad news that sends stock prices lower.
And, of course, you can leverage that 3.2% gain by how you invest in gold.
How do you leverage gains in the price of gold? By investing in the stocks of gold miners rather than gold itself.
You can see this in the relative performance of the SPDR Gold Shares ETF (GLD), which invests in gold, against the Van Eck Gold Miners ETF (GDX), which invests in the stocks of gold mining companies.
For 2023 to date (as of January 27) the Gold Shares ETF was up 5.65%. however, the Goold Miners ETF was up 12.74%.
Why the difference? Gold mining companies have to pay the costs of mining for gold–fuel, equipment, salaries, interest on debt, etc. A gold mining company has to pay all those costs no matter what the price it receives for the gold it produces. Most of those costs don’t rise when the price of gold increases. So even a modest increase in the price of gold can make a huge difference in a gold mining company’s earnings.
The downside of this leverage is that when the price of gold falls–and the costs of producing that gold don’t drop–then gold miners can see their earnings get hammered.
Given all the wind at gold’s back for the next few months–or maybe longer–I’d go with gold mining stocks here.
I already own shares of Barrick Gold (GOLD), my favorite individual gold mining stock (because it actually pays a dividend of 2.8%), the SPDR Gold Trust (GLD), and the Van Eck Gold Miners ETF (GDX) in my Jubak Picks Portfolio. If you already own those positions, you could add the Van Eck Junior Gold Miners ETF (GDXJ) to the mix. The stocks of these smaller gold miners are more volatile than those of the larger companies in the sector and that’s good when gold is climbing. I also own shares of the GLD and GDX ETFs in my Volatity Portfolio.
The major shift I’m going to make on the potential for a rally in gold is in my Perfect 5 ETF Portfolio on my paid JubakAM.com site. There I’m replacing the Invesco DB Dollar Index Bullish Fund ETF (UUP) with the Van Eck Gold Miners ETF (GDX). I’m keeping the 25% allocation for the UUP ETF in this portfolio for the new position in the Gold Miners ETF. My loss in the UUP dollar ETF is 4.57% from inception on July 12, 2022, to the close on January 30. (For more on why I’m selling my dollar position see my YouTube video from January 19, 2023, “Quick Pick Sell UUP.”
