Gold Miners Power Ahead In 2016
London (Apr 15) We’ve spoken in recent letters about gold in 2016, and made some observations about the near-, mid-, and long-term factors that we see at work. This week we simply want to remind investors of the historical relationship between gold bullion and the shares of gold mining companies.
The chart below shows the relative performance of gold bullion and of an index of gold mining companies, from 1996 to the present:
As one would expect, when gold is flat or in a downtrend, the miners are going down gradually or precipitously, and when gold is in an uptrend, the miners are moving ahead faster than the metal.
Investment implications: Under current conditions, after a lengthy decline in the price of gold, accompanied by supportive fundamental political and economic trends, gold shares have the potential to perform very well. We suggest that investors include gold mining shares as a part of their allocation to precious metals.
The U.S. market has had a flat 2016 at the time of this writing; the U.S. stock market has moved sideways for three months. Recently investors, seeing that gold and oil have finished major bear markets, are moving into energy and gold and other metals shares. Technology has continued to be in demand, and so have homebuilders, materials, and REITs. Relative underperformers have included healthcare, retail, transports, and financials. We think it is OK to stay with the U.S. market, but favor the better companies in the strong groups: energy, homebuilders, metals, gold mining, materials, technology, and REITs.
We are not bullish on Europe. Banks are undercapitalized. Immigration will strain the resources of the continent. The UK may leave the union (and the EU will be hurt if it does), and Greece is still not paying its bills. We will seek profits elsewhere.
As we describe above, we do not favor Japan at this time.
Some are interesting -- Russia, Brazil and perhaps India on a correction. China will grow, but owning Chinese stocks is hard at this juncture.