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Unloved and overlooked, gold mining stocks could be the ultimatecontrarian play
Frank E. HolmesWednesday August 10, 2022
Gold mining stocksappear very unloved at the moment. As measured by the NYSE Arca Gold MinersIndex, gold equities fell 18.5% year-to-date through the end of July,underperforming both the underlying metal and the S&P 500. From the index’srecent high set in August 2020, gold miners are off about 42.5%, putting themdeep in bear territory.
When an asset classgets to be this overlooked by investors, I believe the time becomes ripe forcontrarians to consider making a move.
There’s more to theinvestment case than market timing. Systemic risks abound right now that, in myview, could favor allocations to physical gold and gold mining stocks. Thoserisks include sustained inflation, a potential global recession, looming foodand energy crisis, and an escalation of hostilities in Eastern Europe.
Reining in inflationalone will be no small task. The historic jump in consumer prices was likelyyears in the making due to unrestrained money-printing by central banks aroundthe world, coupled with significant supply chain disruptions stemming frompandemic-related lockdowns. Besides aggressive rate hikes, austerity may needto be implemented to mute demand.
Historical Parallels
It’s worth pointingout that the last time we saw inflation this hot was in the early 1980s. Thisprompted similarly aggressive action by then-Federal Reserve Chair PaulVolcker, who raised rates to as high as 19%. Gold responded by soaring to $835an ounce, or more than $3,000 in today’s dollars, an all-time high whenadjusted for inflation.
As I’ve shown youmany times before, gold often shares an inverse relationship with real rates.When inflation-adjusted rates have turned negative, the precious metal hastended to trade up as investors dumped government bonds in favor of gold andother hard assets.
Today, real interestrates are as negative as they were in 1980, but so far, the gold price hasremained below $1,800, some distance from its nominal high of $2,073 an ounce,set in August 2020, and its inflation-adjusted high of around $3,000.
Strong Dollar HasContained Gold
The reason I believewe haven’t seen gold rip to a new all-time high this year in light of systemicrisks is the strong U.S. dollar compared to other world currencies. Like mostother commodities, gold is priced in dollars, so when the value of thegreenback is high, it has the effect of containing the metal’s price.
Year-to-date throughthe end of July, the only major currencies to have increased in value relativeto the dollar are the Russian ruble and Brazilian real. Most currencies havedecreased in value, with the Turkish lira having lost a little over a quarterof its value compared to the greenback.
Below are theresults. While dollar-denominated gold has been stuck in a tight range, goldpriced in the Turkish lira has exploded. Over the past three years through theend of July, the gold price in Turkey has increased fourfold and is currentlytrading near an all-time high, underlining the metal’s perceived role as ahedge against monetary debasement.
A Contrarian Play
As for precious metalminers, I see them as an attractive opportunity right now. They’re trading at ahuge discount compared to the broader equity market, and dividend yields arethe highest they’ve been in nearly a decade.
What I believe couldbenefit miners is a potential pivot by Jerome Powell and the Fed. We’recurrently in a tightening cycle, with another 50- to 75-basis point rate hikeexpected in September. But as soon as the central bank is convinced thatinflation has come under control, policy may rapidly shift back to beingaccommodative to prevent an even deeper economic slowdown. For such acapital-intensive, highly leveraged industry as mining is, that would bewelcome news.
The NYSE Arca GoldMiners Index is a rules-based index designed to measure the performance ofhighly capitalized companies in the Gold Mining industry. The dividendyield is a financial ratio that tells you the percentage of acompany's share price that it pays out in dividends each year. A basis point isone hundredth of 1 percentage point.
By Frank E. Holmes
Contributing to *****.com
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