After
three years of pain, can gold stocks break their losing streak and see a gain
in 2014?
History
says chances are good.
The
most recent string of losses in the gold mining industry has been brutal,
causing many investors to give up on the sector and sell their holdings. Since
the beginning of 2011, the NYSE Arca Gold Miners, the FTSE Gold Mines, and the
Philadelphia Gold & Silver Indices all declined more than 60 percent.
But
ditching this sector may not be the best action to take this year because
miners are approaching the historical limits of multi-year declines.
Take
a look at the Philadelphia Gold & Silver Index (XAU) during prior periods
of stress. While gold stocks have a history of higher volatility compared to
the overall U.S. market, consecutive periods of declines are rare. In 30 years,
the XAU never had a losing streak of more than three years.
In
fact, there were only two previous times in these three decades in which the
XAU saw a trio of losses.
One
was back in the early 1990s, when the index fell 19.09 percent, 16.75 percent
and 11.75 percent in 1990, 1991 and 1992, respectively.
What’s
striking about this period is the incredible rebound that followed. The XAU
rallied 85 percent in 1993. U.S. Global Investors’ Gold and Precious
Metals Fund (USERX) climbed even more, increasing a whopping 124 percent in
1993. See recent performance of USERX.
Could we see a repeat performance?
Perhaps.
A key is watching government policies, as they can be a precursor to change.
Let’s
take a look at the other period of weakness. This three-year loss occurred in
the late ‘90s, with a muted rebound in 1999. However, at that time, the Bank of
England (BOE) was auctioning off a significant amount of its gold reserves when
bullion prices were at their lowest in 20 years. From 1999 to 2002, the central
bank in England sold off 400 tonnes at a value of about $3.5 billion.
If
the BOE had held onto this gold, it’d be worth nearly $15.9 billion today.
Following
the period when the BOE sold its gold, the XAU rebounded. While the index
gained only about 6 percent in 2001, gold stocks rose 41 percent in 2002 and
about 42 percent in 2003.
During
this period, gold and gold stocks were again influenced by a change in
government policy. In this case, the liberalization of gold purchases was
occurring in China, which was positive for gold.
So what about 2014?
What
catalysts could turn gold stocks around and end the losing streak? Investors
have multiple possible events to choose from that could cause gold and gold
companies to rally. In a recent Mineweb article, Lawrie Williams listed several:
·
Gold ETF sales have slowed. See our chart that shows how gold ETF redemptions ceased to be the main driver
of falling prices.
·
The COMEX warehouse is “running out of
available physical gold,” which is causing more traders
to demand delivery of additional gold, says Lawrie.
·
China may continue to build its
gold reserves. Lawrie speculates that China
could have its first gold conference backed by “a slew of government
organisations.”
·
India could ease its gold import
restrictions. Last week in the Investor Alert, we highlighted the commerce ministry’s request to ease restrictions,
which would relieve jewelers hurt by import curbs.
·
Unrest in the Middle East likely could
persist.
·
There may be a “major hiccup” in U.S.
growth. Read U.S. Global’s special
report, which takes a closer look at how to
evaluate unemployment and inflation numbers.
·
Newly mined gold supply may be
underwhelming.
Lawrie
mentions a few downsides as well, which would result in an unprecedented fourth
year of declines for gold stocks. For example, as the Federal Reserve cuts back
on bond purchases, it could come “without adverse general stock market
reaction.” In addition, there may continue to be improvements in the
unemployment situation in the U.S. and Europe.
Ralph
Aldis, portfolio manager of U.S. Global’s gold funds,
the Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund
(UNWPX), believes the best time to buy gold is when the market hates it. He
recently talked with The Gold Report about gold, junior explorers and what
investors should expect in the New Year. When asked his thoughts about gold’s
direction in 2014, Ralph remarked:
“I think pessimism has reached a
maximum, particularly in the gold space. Historically, when pessimistic
consensus is this strong and gold stocks are hated this much, these are turning
points.
The opportunity is here; don’t get discouraged.”
Please
consider carefully a fund’s investment objectives, risks, charges and expenses.
For this and other important information, obtain a fund prospectus by visiting
www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it
carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Past performance does not guarantee future results.
Gold, precious metals, and precious minerals funds
may be susceptible to adverse economic, political or regulatory developments
due to concentrating in a single theme. The prices of gold, precious metals,
and precious minerals are subject to substantial price fluctuations over short
periods of time and may be affected by unpredicted international monetary and
political policies. We suggest investing no more than 5 percent to 10 percent
of your portfolio in these sectors.
All opinions expressed and data provided are
subject to change without notice. Some of these opinions may not be appropriate
to every investor. The link above may be directed to a third-party website.
U.S. Global Investors does not endorse all information supplied by this website
and is not responsible for its content.
The NYSE Arca Gold Miners Index is a modified
market capitalization weighted index comprised of publicly traded companies
involved primarily in the mining for gold and silver. The index benchmark value
was 500.0 at the close of trading on December 20, 2002. The FTSE Gold Mines
Index Series encompasses all gold mining companies that have a sustainable and
attributable gold production of at least 300,000 ounces a year, and that derive
75% or more of their revenue from mined gold. The Philadelphia Stock Exchange
Gold and Silver Index (XAU) is a capitalization-weighted index that includes
the leading companies involved in the mining of gold and silver.
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article was posted with the permission of a third-party contributor
and the opinions contained therein do not necessarily reflect
those of Smallcappower. Smallcappower does not endorse any investment
advice provided by these third-party contributors. Please consult
your investment advisor before making any investment decisions.
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