Overshadowed by the wild swings in Bitcoin and other cryptocurrencies, the original counterpoint to paper money—gold—has been quietly on the upswing this month.
Even more than the metal, shares of gold miners have rebounded and gained relative strength versus the broad stock market. Gold mining stocks tend to be a leading indicator for bullion given their earnings leverage relative to the metal’s moves.
The VanEck Vectors Gold Miners exchange-traded fund (ticker: GDX) is up 18.31% from its low in late March. The rebound follows a bona fide bear market decline of 35.4% from the ETF’s 52-week high last August to its 52-week low in March. But over the past month, the gold stock ETF is up 8.7% versus a 5.7% gain in the S&P 500, according to Yahoo Finance.
The yellow metal itself has climbed off the mat over the past few weeks, rising to $1,795 an ounce, close to a two-month high and up 6.51% from its low in late March. That’s still well down from its recent high of $1,951 an ounce in early January. In a client note published late Wednesday, Bespoke Investment Group said gold rose above its 50-day moving average.
The recovery in the barbarous relic, as John Maynard Keynes called the metal, has been overshadowed by the gyrations of Bitcoin, including last weekend’s flash crash, and other cryptocurrencies, along with the public debut of Coinbase (ticker: COIN.) Doge Day turned out to be a bust as the bulls backing the one-time joke cryptocoin failed to push it to $1. More important, J.P. Morgan quantitative and derivative strategists point to shift in Bitcoin futures after the cryptocurrency failed to break out above $60,000 that shows traders are reducing their positions.
Beyond Bitcoin, other recent indicators from the bond market have been working in gold’s favor. Specifically, as real long-term interest rates—bond yields after adjusting for inflation—have declined, the metal has perked back up.
The fall in real rates can be seen in yields on Treasury inflation-protected securities. TIPS pay a real yield while their principal value is adjusted according to the Consumer Price Index. The real yield on the 10-year TIPS had been rising sharply earlier in the year, from negative 1.06% in February to negative 0.56% in mid-March. Since then, the bond market has rallied, with the 10-year TIPS yield falling back deeper into negative territory to minus 0.78%.
The better relative performance of gold mining shares such as Barrick Gold (ticker: GOLD) is another positive for the metal. Gold stocks tend to be more volatile than the metal given the shares provide a leveraged play. But the mining shares also can provide dividend income. Indeed, Barrick’s dividend yield of 1.58% matches that of the benchmark 10-year Treasury note, while providing inflation protection that bonds cannot.
Inflation remains the top-of-mind worry of most investors. The Federal Reserve’s avowed aim to lift inflation “moderately above” its 2% target seems assured by its super-easy policies of near-zero interest rates and expanding its balance sheet at an annual rate over $1.4 trillion. At the same time, the federal budget deficit is projected by the Congressional Budget Office to total $2.3 trillion in fiscal 2021, 10.3% of gross domestic product. That would be the second-largest shortfall since 1945 after last year’s 14.9% of GDP. Against that monetary and fiscal backdrop, it’s not surprising investors are puzzled by the dip in bond yields.
In any case, cheap and abundant money again is lifting gold and mining shares even as cryptocurrencies sputter for now.
Write to Randall W. Forsyth at [email protected]
