Why is Gold Today’s Most Interesting Chart?
I asked Tim Lutts, Cabot’s boss (and Chief Analyst of Cabot Stock of the Week) for his choice of the most interesting stock chart right now.
This wasn’t really a random question, because his choice of a chart would tell me what’s uppermost in his mind about what’s happening in the market. Plus, I knew that Tim would take the question seriously.
Still, his answer surprised me. Why? Well, here’s the chart.
This is a monthly chart of the SPDR Gold Shares ETF (GLD), the gold ETF that tracks the price of gold bullion since its inception in 2004. It shows the long (six-year) bull market in gold from the middle of 2005 to the middle of 2011. It also shows the four-and-a-half year bear trend that ran until six months ago.
And, most importantly, it shows the 28.3% increase in the price of gold since its low in December.
Ask most investors why gold, and gold stocks, are thriving and they will probably answer with some combination of inflation fears (from central bank money printing) or fear and uncertainty about the general financial system. But if you really look at the data, neither assertion holds up.
One explanation for the appeal of gold is that it’s a hedge against inflation, a real source of value when currency is losing its buying power. Unfortunately for that theory, the U.S. rate of inflation for the 12 months that ended in May 2016 was 1%. And while that’s up from the 0.8% rate in calendar 2014 and 0.7% in 2015, it’s hardly a reading that strikes fear in investors’ hearts.
Inflation was actually higher in years when gold was falling. And gold prices fell for four years even as the Fed kept interest rates super low.
Another common explanation is that gold prices reflect anxiety and uncertainty about the future. But if you look at a chart that compares the price of gold (as measured by the gold ETF GLD) with the S&P 500 Volatility Index (VIX), that doesn’t hold, especially if you look at the mostly calm VIX readings since the gold rally began in late 2015. (GLD in red, VIX in blue)
As for fear, that might have something to do with GLD’s latest post-Brexit pop, but the gold ETF has been doing better after the worst of the global credit crunch.
I’m not going to get into the idea that the price of gold is being pushed up by doomsday preppers who anticipate using their krugerrands after society collapses. The amount of gold being held by SPDR Gold Shares just exceeded the holdings of the Chinese government, so this is not a phenomenon that’s being powered by a fringe group.
My best guess on why gold is outperforming the market is that investors are just piling into an undervalued commodity. That’s not a sexy answer, but I think it’s the truth.
When I help write about gold mining companies for Cabot Top Ten Trader, one common theme is that the miners who are doing well now are the ones that have tightened their belts during the lean times. Strict cost controls, investments in more efficient equipment and higher-grade locations have pushed the cost-per-ounce figures lower. The miners who are doing the best now are those who were still making money during the worst years for gold prices. We’ve been able to hit on many gold winners this year by just following the charts.
Trends are always over-caused, and isolating any one factor as the sole cause is usually a mistake. With gold, the emotional pull of owning gold, the rational appeals of guarding against inflation (even when it’s low) and putting money to work in an undervalued asset, and the appeal of an asset with positive momentum combine to produce a very interesting gold ETF chart. And that’s exactly what I asked Tim for.
Thanks, Tim.
You can find more details on how you can profit from the market’s fastest-growing stocks by subscribing to Cabot Top Ten Trader. Since the beginning of the year, our readers grabbed a 110% return in Barrick Gold, a 82% gain in Agnico Eagle Mines, a 53% gain in Newmont Mining, just to name a few.
Fortune Cookie: The Difference Between Life and the Movies
“The difference between life and the movies is that a script has to make sense, and life doesn’t.”—Joseph L. Mankiewicz
Tim’s comment: My first response is to ask, “Life doesn’t what? Life doesn’t make sense or life doesn’t have to make sense?” I assume he meant the latter. In any case, for investors, the important thing to know is that the market does make sense, but it has its own logic, which incorporates far more factors than most investors typically consider.
Paul’s comment: I’ve been a movie buff for many decades, and I can tell Mr. Mankiewicz that there are plenty of movie scripts that don’t make any sense either. But that’s quibbling when you’re talking about the man who directed and wrote the script for All About Eve. But I think his remark is perfectly applicable to stock markets, which defy prediction. The behavior of markets makes no sense to me, which is why I stick to individual stocks, where my analysis can get a little traction.
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