• Gold

    2017: Gold still on the run

    Russel Chesler, Director, Investments & Portfolio Strategy
    24 January 2017
     
    • In 2016 the price of gold rose 8.6% for its first annual gain in four years
    • In 2016 gold miner’s outperformed bullion with GDX’s Index returning 55.08%
    • In 2017 there are a number of risks the market faces which could benefit gold and gold miners
    • GDX gives investors instant access to 51 of the largest and most liquid global gold mining companies in a single trade on ASX 

    Gold is one of the most traded asset classes in the world.  According to the World Gold Council1, “Gold ranks higher than all European sovereign debt markets and trails only US Treasuries and Japanese government bonds.” For investors gold has been seen as a safe haven for portfolios however gold does not pay dividends and there are costs for storage and insuring gold.

    Last year marked a major turning point for gold investors.  Gold bullion gained US$91 per ounce or 8.6% in 2016 for its first annual gain in four years.

    Through most of 2016 we had been very optimistic about gold, believing it had embarked on a new bull market. This belief was based on fundamentals, which included unprecedented levels of government debt and monetary policies which distort markets and pose systemic risks such as quantitative easing and negative rates.  However, the turn in markets following the US presidential election took us entirely by surprise.

    We believe 2016 was a base-forming phase for gold, probably a precursor to a bull market. In addition to the fundamentals which drove the gold price higher 2016, there are a number of risks which further support the price of gold in 2017.

    The stock market rises since the US election reflect a consensus for robust economic growth under a new US president however it seems the market is ignoring many potential risks the new administration may face. These include attempting to change trade treaties, immigration policies, the national debt and Fed tightening. Potential moves by China or Russia, disarray in the EU and strife the Middle East could also impact the administration's efforts. We believe many of these risks will surface in 2017, reversing the positive sentiment in the stock market and US dollar to gold's benefit.

    Gold bullion vs gold equities

    One way investors can get exposure to fluctuations in the price of gold bullion is via gold equities. Unlike gold bullion, gold equities have the potential to pay dividends and there is no cost for storage or insurance.  Changes in the prices of shares in gold mining companies are traditionally correlated to the gold bullion price2.

    This was reflected in 2016 when gold miner’s as represented by GDX’s Index returned 55.08%.

    There are reasons for the spectacular performance of gold miners in 2016 including:

    • Gold companies impressed investors with cost controls, operating results and overall financial discipline
    • A rebound from 2015 bear market levels resulted in them being oversold as the industry fell out of favour with investors who had been avoiding the sector, driving valuations to record lows
    • Earnings leverage to gold price

    Australian investors can capture the potential upside of gold equities in 2017 by investing in GDX, the largest global gold equities ETF in the world. GDX gives investors instant access to 51 of the largest and most liquid global gold mining companies in a single trade on ASX.

    GDX is the most traded gold equities ETF in the world with ~A$1 billion traded daily on NYSE.  GDX's popularity with brokers, financial advisers, hedge funds and retail investors has made it the third most traded security in US in 2016 (Source: Credit Suisse Trading Strategy as cited by Bloomberg, 13 January 2017).

    If you would like more information on  GDX please contact our ETF specialists on 02 8038 3300 or email us at info@vaneck.com.au


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    This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Investing in international markets has specific risks that are in addition to the typical risks associated with investing in the Australian market. These include currency/foreign exchange fluctuations, ASX trading time differences and changes in foreign regulatory and tax regulations.  Before making an investment decision in relation to the US Fund you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at  www.vaneck.com.au or by calling 1300 68 38 37.

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    An investment in the US Fund may be subject to risks that include, among others, competitive pressures, dependency on the price of gold and silver bullion that may fluctuate substantially over short periods of time, periods of outperformance and underperformance of traditional investments such as bonds and stocks, and natural disasters, all of which may adversely affect the US Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates that may negatively impact the US Fund’s return. Small- and medium- capitalisation companies may be subject to elevated risks. The US Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

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    1World Gold Council (2011).  Liquidity in the global gold market

    2Brian Lucey and Fergal O’Connor (2016) concluded in Are Gold Bugs Coherent? “that there is little relationship in the short run but some significant and long standing long run relationships” between the prices of gold equities and the price of gold bullion.   

    The paper tested a period that included the bottoming of the gold price at just over US$250 per ounce in 1999 through to its nominal high at US$1879 per ounce in 2011.  The authors used a sophisticated mathematical technique called wavelet analysis.  Wavelet analysis has been applied for many years to mathematics, physics, engineering and meteorology. Academics have now expanded its use to econometrics and finance.  The maths involved is too complex to explain here but the results of the paper demonstrate that for periods one year or greater the prices of gold equities in general follow the gold bullion price.