Earlier this year, we advised stepping up our position in the VanEck Vector Gold Miners ETF (GDX), and it has been a valuable hedge during turbulent times, asserts Jim Stack, money manager and editor of InvesTech Research.
We had seen the fastest decline into bear market territory in over 120 years of Wall Street history, with the S&P 500 losing -20% in just 22 days. While it was “average” in the depth of loss (-34%), the dramatic rebound and recovery to new S&P highs made it the shortest bear market in Wall Street history.
While some might get caught up in semantics – Does that really qualify as a bear market? – we are instead focused on residual risks and new dangers created by the unprecedented injection of fiscal and monetary stimulus… over $7 trillion so far!
There were already late-cycle economic pressures and plenty of speculative excess before COVID-19 hit, and the flood of “easy money” has further inflated that problem.
With the worst of the COVID-19 induced shutdowns possibly behind us, the reason to maintain our 8% position in gold mining stocks is the unbounded fiscal and monetary stimulus implemented in response to the virus.
This puts unrelenting pressure on the U.S. dollar — and gold has an inverse relationship to the dollar. There have been at least three sustained declines in the currency since 1974. Each was accompanied by a run-up in gold prices.
The latest rally in gold started in 2015 with the reignition of inflation fears and the initial hike in short-term interest rates. The rally picked up the pace when the Fed started buying treasuries to settle volatile overnight bank lending rates last year.
And now, the Federal Reserve’s COVID-19 response has flooded the U.S. markets with liquidity, leading to a renewed decline in the dollar.
While the latest move in gold prices has been impressive, it is small compared to the gains in the late 1970s and at the turn of the century. As long as monetary mayhem reigns supreme, there will be further upside potential in gold and a reason to hold GDX.
