For Christmas 2018, investors are getting gold in their stockings. That’s not as nice as it sounds.
As we head into the end of the year, markets are in turmoil. For example: On the Nasdaq and New York Stock Exchange, the percentage of stocks making 52-week-lows — now 38 percent — is at a historic level.
There were only eight other days since 1984 with a greater percentage of 52-week-lows, according to Sundial Capital Research. Those eight days were the crash of 1987 and its aftermath and the days surrounding the collapse of Lehman Brothers in the 2008 financial crisis.
There’s no use sugarcoating it. The volatility is extreme. Understanding this is a reason to stay calm, not to get agitated. It’s reasonable to have a sense of unease with all that’s happening. But markets will get through this — they always do — and even with the current troubles, there are bullish areas of the market and attractive places to invest. One such area is gold and gold stocks.
GDX, the bellwether gold stocks ETF, has been in a rising trend for weeks, even as most other equities are down. And gold itself has been working on a bottom formation since August.
You can see this in the chart for spot gold futures as shown below. Spot gold futures registered a potential bottom in August 2018, and gold just crossed above its 200-day moving average this week (the red line on the chart).
Gold stocks are also shifting into bull mode.
GDX, the Van Eck gold miners ETF, is still in the red zone. But the short-term trend for GDX has turned higher, and several GDX components are already in a positive mode with yellow or green SSI status.
Below you can see a cross section of GDX components in the yellow or green zone. As the price of gold rises, and potentially bottoms, more capital could flow into gold stocks, propelling these trends higher and transitioning more names into positive mode.
In historic terms, it’s no surprise to see the yellow metal zig when everything else zags. Gold stocks performed quite well in the 1930s, for example, due to rising profit margins as operating costs declined and the price of gold stayed fixed. Why are gold and gold stocks doing well in the midst of market turmoil?
Heading into 2019, gold and gold stocks are channeling investor worries around slowdown, debt, and inflation. These things are all connected: In the event of global slowdown, debt levels are likely to rise as governments borrow and central banks stimulate.
But with debt levels already high, more borrowing and stimulus could spark inflation and a loss of faith in paper currencies — which benefits both gold and gold stocks.
There are multiple flashing red lights warning of global slowdown right now. One of them is the price of crude oil, the world’s most important commodity. The price for the two major crude oil benchmarks, Brent and West Texas Intermediate, has declined roughly 40 percent since the beginning of October — a historic collapse in such a short space of time. This suggests global oil demand is in trouble.
Then too, bellwether companies like FedEx, who have a finger on the pulse of global business, are talking slowdown. In its latest earnings report — a disappointment — Alan Graf, FedEx’s executive vice president and chief financial officer, said the following: “Global trade has slowed in recent months and leading indicators point to ongoing deceleration in global trade near-term.”
This is a worry because the typical response to slowdown is piling on more debt. Governments step up spending to help the economies, and central banks revert to easy money policies and stimulus.
But the world is already awash in debt, and the debt hangover from the last round of central bank stimulus hasn’t yet passed. According to IMF data, global debt levels are more than $180 trillion. And central banks already have trillions of dollars on their balance sheets, with interest rates at historic lows.
So, it’s not clear governments can borrow more trillions to fight yet another slowdown, or whether central banks can add trillions more in stimulus to their balance sheets, without leading to a pick-up of inflation and a loss of faith in paper currencies.
If that happens, it will benefit gold and gold stocks — possibly in a major way.
The positive trend in gold and gold stocks, even as global stock markets see red, shows investors are giving more weight to this possibility now.
That makes gold stocks increasingly attractive, but it might not be what the rest of the market hopes to find in its stocking.
Richard Smith, PhD
CEO & Founder, TradeSmith