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Examining Gold’s Recovery Cycles

20 March 2020


While the outcome of this most recent market sell-off and related pandemic are yet-to-be-seen, we remain optimistic about the outlook for gold and gold stocks in the near-term. Much of the market movement in gold prices is relatively easy to explain, while gold companies continue to exhibit, we believe, truly compelling fundamentals and valuations. With respect to the pandemic, companies are taking all precautions, and although we do anticipate that some operations will be impacted, discussions we have had with companies indicate that every effort is being made to ensure inventories, supply lines, employee health and back-up redundancies are in place to sustain production.

Below is a summary of our most recent takeaways.

We believe there are, predominately, two reasons why gold has been under pressure as of late.

  • Unwinding of hedged positions in risk parity and other volatility model funds – Gold, commodity and fixed income investments are typically leveraged in risk parity models (based on their underlying volatility relative to equities), so substantial liquidations in these funds have led to outsized, forced selling of these assets.
  • Liquidations to raise cash –  Selling to meet margin calls and raising cash to cover stock market losses, especially among leveraged funds, is commonplace during market sell-offs.

We believe that gold/gold stocks tend to recover faster than the broader markets following crises.

  • More recently, during the 2008 financial crisis, gold and gold stocks bottomed and recovered much earlier than the S&P 500—recouping losses at/around the time the S&P reached its lows in February/March 2009. The S&P 500 took nearly two years to reach its pre-crisis levels again.

Gold and Gold Stocks Recovered Before S&P 500 During 2008 Financial Crisis

Gold and Gold Stocks Recovered Before S&P 500 During 2008 Financial Crisis

Source: VanEck, Bloomberg. Data as of March 2020.  “S&P 500” represented by the S&P 500 Index TR (SPXT). “Gold Stocks” represented by the NYSE Arca Gold Miners Index Net Total Return (GDMNTR). “Gold” represented by gold spot prices.

  • Looking at other past market sell offs, gold has held up particularly well while gold stocks—though often following the broader equity market through a drawdown—have, on the whole, outperformed over the full cycle (drawdown to recovery).

Drawdown to Recovery

Source: VanEck, Bloomberg. Data as of March 2020. Index returns are cumulative. “S&P 500” represented by the S&P 500 TR Index (SPXT). “Gold Stocks” represented by Barron’s Gold Mining Index (BGMI) from January 1973 to inception date of the Philadelphia Gold and Silver Index (XAUTR) in January 1984 and XAUTR to the inception of the NYSE Arca Gold Miners Index Net Total Return (GDMNTR) in October 1993. “Gold” represented by gold spot prices

We believe that gold stocks, generally speaking, remain in fundamentally good shape.

  • We expect no credit problems, while the lengths to which companies have gone to reduce costs and capital expenditures and to avoid mistakes of the past could translate to an additional near 40% increase in free cash flow, on average, for a gold price move from $1,600 to $1,800 (for seniors and mid-tiers).

Estimated Free Cash Flow for Gold Price Moves

Estimated Free Cash Flow for Gold Price Moves

Source: VanEck, Bloomberg. Data as of March 2020. “Senior” miners defined by production levels of approximately 1.5-6.0 million ounces of gold per year (“Mid-Tier” approximately 0.3-1.5 million ounces per year).

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This information originates from VanEck (Europe) GmbH which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin). The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index.

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