Breaking through the ceiling
We have talked frequently about the fundamental and technical importance of the US$1,365 per ounce level for gold, which has roughly been the top of its trading range for the past six years. Last week gold spiked above US$1,400/oz—a move driven by a change in the US Federal Reserve's (Fed’s) outlook that increases the chances for a series of rate cuts to stimulate both the economy and inflation.
Gold Price, 2008 to 2019
Source: Bloomberg. Data as of June 2019.
The Fed update came on the heels of the European Central Bank's comments earlier last week indicating that rate cuts are also on the table in Europe. US Treasury rates have fallen to new intermediate-term lows, while the US dollar has also dropped to the low end of its recent trading range.
A new gold bull market?
If gold holds above the US$1,400/oz trading level over the course of this week, we believe there is a very good chance that this could mark the beginning of a new gold bull market. In any case, it appears gold has entered a higher trading range.
The shift in central bank policies denotes a change in the macroeconomic environment that brings new levels of risk to the financial system. Central banks see a downturn coming. However, many investors believe they have limited ability to fight a recession with US interest rates already at 2% and European interest rates below 0%. In addition, quantitative easing has lost its efficacy. Layer on global trade and geopolitical tensions, and it is not hard to imagine a "flight to safety" that moves gold much higher.
The US stock market’s blind faith in the Fed's policies is pushing the market back to its highs. This makes the market vulnerable to weak economic news or any signs that indicate the Fed is unable to curtail a downturn. We believe any stock market selloffs should further propel gold as investors move away from risk.
Gold Stocks Regaining Their Luster
The range-bound gold market of the past six years has brought a lack of interest in gold stocks. As a result, gold stocks are trading at low valuations and many mid-tier and junior stocks are carrying deep discounts. If we are correct in calling for a stronger gold market, we expect the equities to significantly outperform bullion. Gold companies carry earnings leverage to rising gold prices that should receive an additional value boost as positive sentiment returns to the sector.
Price-to-Net-Asset-Value of North American Gold Producers (at Gold Spot Price)
Source: RBC Capital Markets. Data as of June 2019.
Issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’). VanEck is a wholly owned subsidiary of Van Eck Associates Corporation based in New York, United States. VanEck Vectors ETF Trust ARBN 604 339 808 (the ‘Trust’) is the issuer of shares in the VanEck Vectors Gold Minders index ETF (‘US Fund’). The Trust and the US Fund are regulated by US laws which differ from Australian laws. Trading in the US Fund’s shares on ASX will be settled by CHESS Depositary Interests (‘CDIs’) which are also issued by the Trust. The Trust is organised in the State of Delaware, US. Liability of investors is limited. VanEck Associates serves as the investment adviser to the US Fund. VanEck, on behalf of the Trust, is the authorised intermediary for the offering of CDIs over the US Fund’s shares and issuer in respect of the CDIs and corresponding Fund’s shares traded on ASX.
This information contains general advice only about financial products and is not personal 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 laws and tax regulations. Before making an investment decision in relation to a 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.
Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies or the Trust gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the US Fund.
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.
NYSE Arca Gold Miners Index is a trademark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck in connection with the US Fund. Neither the Trust nor the Fund is sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding the Trust or the Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance.
ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE ARCA GOLD MINERS INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.