The gold bull market passed two important sign-posts in July. The strength of the market is impressive as it blew through $1,800 and the all-time high of $1,921. These prices had been major technical resistance points set a decade ago.
The second significant signpost in July was the new U.S. dollar weakness. U.S. dollar weakness is a hallmark of most gold bull markets, but in this cycle gold had so far been rising in a flat dollar environment. The chart below shows the U.S. dollar index (DXY)1 has been in a bull market since 2011. However, the dollar declined through July, then fell precipitously at the end of the month, appearing to have broken its long-term trend. We may be seeing the beginnings of a bear market for the dollar. This enabled gold to test the $2,000 per ounce milestone as it reached an intraday high of $1,983 on July 31. Gold closed out July at $1,975.86 per ounce for a $194.90 (10.9%) monthly gain.
Source: VanEck, Bloomberg. Data as of July 31, 2020. Past performance is not a guarantee of future results.
Gold stocks moved higher as the vast majority of companies reporting second quarter results met or exceeded expectations. COVID-related costs were also reported, showing the industry has done an excellent job of dealing with operational issues in our view. For example, 1.7 million ounce producer Agnico-Eagle (approximately 4.7% of net assets as of end-July) was among those hardest hit by pandemic lock downs. Its costs for temporary mine suspensions totaled $22 million, whereas the cash provided from operations totaled $162 million. Going forward, per the company’s second quarter 2020 financial results, Agnico-Eagle expects COVID protocols to cost $6 per ounce, which raises their cash costs by less than 1%. For the month, the NYSE Gold Miners Index (GDMNTR)2 gained 14.4%, while the MVIS Global Junior Gold Miners Index (MVGDXJTR)3 advanced 19.8%.
Junior developers are a class of company that you won’t find much of in passive index funds like GDX or GDXJ. These are companies with properties that are in various stages of development, but not yet producing gold. Our active gold equity strategy invests across the spectrum of companies and currently carries 22 junior developers that total approximately 26% of the strategy’s net assets as of end-July. These companies had been underperforming since the gold price broke out in June 2019. This is a sharp contrast from past bull markets, when the juniors began outperforming the larger companies much earlier. Through the second quarter and into July, the junior developers have finally kicked into gear. Seven of our juniors have now gained over 100% year to date. We don’t expect to give back these gains because the stocks had been extremely undervalued and many of our companies have announced encouraging drill results and new discoveries that create lasting value. In addition, investors have returned to the junior sector, enabling companies to raise $1.5 billion this year, and the second quarter was their strongest for equity raises since 2012, according to RBC Capital Markets.
Gold has tested the $2,000 per ounce level sooner than we had anticipated and we believe there is more than the pandemic to overcome at this point.
The pandemic created a deflationary shock to the economy and the massive accumulation of debt since the GFC creates a drag on productivity that could guarantee a low growth economy for decades to come. Negative real rates, persistent risks to economic well-being, and the weak dollar are drivers that we believe could enable gold to trend to $3,400 per ounce in the coming years. This might be a conservative forecast considering the 180% rise gold experienced from the depths of the GFC (see our gold price projection here). Several scenarios could see gold prices moving higher from there:
Some might balk at such bold forecasts, however, we believe the various drivers of gold are rarely aligned as they are today. We also consider gold’s relative size in the financial markets. There have been 200,000 tonnes of gold mined in the history of the world and virtually all of it is potentially available to the market. A gold price of $2,000 per ounce yields a market value of $12.9 trillion. Compare this with global stock, bond and currency markets, each of which totals roughly $100 trillion or more. A relatively small shift in funds from these markets may fuel the gold price for a long time.
In addition, the market value of the global gold industry as of end-July is approximately $530 billion. The market value of Alphabet Inc. as of the same time, alone, is $1.0 trillion. Gold mining is a relatively tiny sector that, in addition to carrying earnings leverage to the gold price, carries a scarcity factor when market demand is high.
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1U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar by averaging the exchange rates between the U.S. dollar and six major world currencies. 2NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 3MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.
Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.
MVIS Global Junior Gold Miners Index (the “Index”) is the exclusive property of MV Index Solutions GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors Junior Gold Miners ETF (the “Fund”) is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.
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