2016-06-05
It is timely to discuss the future of the market for goldminers.
Friday June 3 marked an important date for precious metals investors. The VanEck Vectors Gold Explorers ETF (GDXJ) soared +12.3% on the day, taking this fund +9.8% higher on the week, closing at $37.96. Three-month average daily trading volume of 13.2 million shares soared to an astounding 33.7 million shares (of just 75.3 million outstanding), resulting in a turnover of $1.2 billion on the day. That the event occurred in a softening market with the 50-Day Moving Average holding firm is evidence the world is watching.
A month ago (May 9), I wrote the following in this blog:
In his classic 1870’s book on banking, “Lombard Street,” Walter Bagehot wrote: “Every banker knows that if he has to prove he is worthy of credit, in fact his credit is gone.”
Trump and others are now saying it’s too late to prove it, the credit is in fact gone, and the creditors of the US must now recognize this fact, and write off much of the debt.
Of course, this situation is a positive for gold and silver prices, which are likely to rally to new highs to well above 1800. The price could even rise to the $5,000 level espoused by people like Rob McEwen before the global debt issue is resolved and G20 currencies are adjusted to reflect economic reality. Higher gold prices – at least those perhaps 20% above the all-in cost of discovery, production and sales – is simply inflation-based, and not real wealth.
On that day May 9, GDXJ closed at $34.90, down -7.5% on a turnover of 20.4 million shares. While many investors were thinking that the brief Gold Bull had died or at least was in danger of doing so, I was opining that the Gold Bull was alive and well and “likely to rally to new highs to well above 1800”. What I was inferring, for example, was that GDXJ would be returning to its April 2011 high of $150, and do so quickly.
GDXJ is an index fund that represents about 70 so-called junior goldminers, but we know that some of them like Alamos Gold are relatively large. The index fund of the senior goldminers is GDX. A comparison of the two can be found here:
http://etfdb.com/tool/etf-comparison/GDX-GDXJ/
GDX has actually out-performed GDXJ recently. GDX soared +13.7% this week versus the gain of +9.8% for GDXJ. However, in my view, the more attractive index fund at this point is GDXJ.
What is happening today is that investors have stopped listening to the Fed talk about lifting rates. The economy is strong only in the minds of the Wall Street-White House crowd. The rest of the world knows better. Real wealth is not being created. It is being taxed out of existence by interventionists who believe their status quo policies are best. Unfortunately, for them, their money is on a slippery slope to something approaching worthless. No, we are not there yet; however, when real estate that is being funded by historically low mortgage rates fails to earn an economic return, and the true credit of the world’s biggest economies is dubious, then investors will turn to gold. And they are.
In a Gold Bull, the miners are favored over the physical metal, which is why most investors have been buying GDX and GDXJ. Yes, these indexes include bad companies as well as good, but when there are not many bad stocks at the present time, does stock-picking among the goldminers really matter to most of you? No, I think GDXJ will meet the needs of most investors today.
Remember, GDX and GDXJ represent the enemy to the interventionist central banks and governments of the G20 nations. The months ahead will not be a minor skirmish, but more like a world war, certainly the one news item that might divert the eyes of the world from the nasty Clinton-Trump fight to take control of America.
You see: Clinton-Trump is merely reality TV on a par with The Real Housewives of Beverly Hills and Keeping Up with the Kardashians, whereas gold represents real money – all of ours.
As for the politics, will the public’s choice be the Bachelor or the Bachelorette? As for you and I, will it be GDX or GDXJ?
/Bill
