Now That Rates Are Unchanged (Again), What Does That Mean For Gold Miners?
It’s not a stretch to say that gold miners stocks have been ripe with momentum. After all, the heightened activity is a result of a fear trade being fueled by what investors hate most – uncertainty. That worldwide uncertainty could continue for many months as investors speculate on movements in currencies and interest rates, as well as brace for any post-Brexit political moves.
The decision for Britain to leave the EU sent shock waves through gold and silver markets, and it appears since then that investors can’t get enough of precious metals. A pullback seems likely at some point, that is, unless the recent halt in the gold rally is evidence that one is already in motion.
Gold’s longest rally in six weeks has paused on news that the U.S. job market is showing continued signs of strength, meaning fewer investors see a need for a safe haven. If jobs growth continues, metal prices might calm down after rallying in anticipation of a slow-moving Federal Reserve.
But if you’re Australia’s third-largest gold producer, you may not be so ready to adopt that short-term view. “We are on a longer-term trend for the gold price,” Northern Star Resources’ CEO Bill Beament said in an interview with Bloomberg in early August. “The valuations have still got a long way to go and people are projecting the gold price to go up,” he told them. Whether gold is just getting started or has engorged itself on all the global volatility there is depends on whether investors see a market shift or a change in appetite.
These developments come in the wake of a Bloomberg report in July that the recent surge created a valuation problem for at least one bank, UBS Group AG (OTC: UBS), who’s had an eye on Randgold Resources Ltd. (NASDAQ: GOLD) up 49%, and Fresnillo Plc (LON: FRES) up 61%, since the referendum. That prompted the bank tell Bloomberg, “at some point valuation has to limit equity outperformance versus the gold price."**
The Department of Labor reported in August that nonfarm payroll employment increased by 275,000 in July. Based on comments from Fed Chair Janet Yellen, while this lower-than-expected slowdown may not prompt an immediate rate hike, it could be an argument to make a move. But WHEN? That of course was followed by an August jobs number of 151,000 jobs added (a decent gain but still fewer than July) and a September increase 156,000 jobs added (lower than the 175,000 estimate).
Is it possible that uncertainty is more of a permanent fixture, becoming the rule rather than the exception? One interpretation of currency markets seems to suggest so, as reported in July by Business Insider, based on research from currency analysts with Barclays.
“The UK’s vote to leave the EU has ushered in what looks set to be a long phase of uncertainty. The implications of the vote are broad, with very direct economic and political fallout for the UK and Europe…The effect on risk appetite and asset allocation decisions will likely be significant and long lived,” the report said.
With that outlook, the risk adverse might take even more of a shine to gold miners.
But are miners overbought?
The Fed left interest rates unchanged, but reported that risks to the U.S. outlook have “diminished” and the labor market is getting tighter. Does the Fed think conditions are turning more favorable for rate increase?
Gold prices, currently around $1,332 an ounce, are up around 30% year-to-date, following a broad decline in global bond yields and the Fed’s decision to leave interest rates unchanged. Many investors, of course, prefer miners to bullion to gain exposure to rising metal prices. The Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG) gained 483% as of July 25.
Date range: 7/1/2016 – 9/30/2016. Source: Bloomberg. Past performance is not indicative of future results. One cannot invest directly in an index.
As of September 9, traders re-lived past central bank “hawk talk” woes. Stocks and bonds went into a free fall Friday, an effect triggered by Federal Reserve hawkishness. The S&P 500 Index tumbled 2 percent in its biggest drop since the Brexit vote, while Treasuries slumped, sending the yield on the 10-year note to the highest since June. Assuming we have no meaningful drop in core inflation, rate watchers are once again anticipating a December rate hike is likely.
Here are the top 10 holdings of the index tracked by JNUG and NUGT as of September 30.
* The Net Expense Ratio includes management fees and other operating expenses, but does not include Acquired Fund Fees and Expenses. The Funds’ Advisor, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with each Fund, under which Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse each Fund for Other Expenses through September 1, 2017, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% (excluding certain expenses such as management fees, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, or other expenses outside the typical day-to-day operations of the Fund). If these expense were included, the expense ratio would be higher.
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.
Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.
** These companies are not in the funds mentioned.
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