Gold Going Gangbusters

From The Maven Letter: 3 April 2024

Gold is marching higher. At close the price reached $2300 per oz.

It’s a very impressive chart.

As I wrote at length last week, this move is coming entirely from Asia. The People’s Bank of China (PBoC) is buying gold hand over fist. Meanwhile, putting money into gold as a store of wealth is resurging in China, especially among people 25 to 35 years old.

Here’s how the article in The Straits Times starts:

BEIJING – With China’s deflation at its worst in 15 years, a volatile stock market and bank interest rates too low for her liking, 18-year-old Tina Hong is placing her financial security in gold beans.

Weighing as little as one gram each, the beans – and other forms of gold jewellery – are increasingly viewed as the safest investment bet for young Chinese in an era of economic uncertainty. It is part of a larger consumer trend for all things gold – from bullion to beans and bracelets – that has gripped the mainland.

“It’s basically impossible to lose money from buying gold,” reasoned Ms Hong, a college freshman studying computer science in Fujian province.

Later the article points to the hashtag “Why Are Young People Getting Into Buying Gold?” garnering 91 million hits on Weibo (the Chinese equivalent of Twitter/X) and notes that precious metals now represent one of the fastest-growing consumer markets in China.

China is driving gold higher. This is unusual – it’s usually Western investors who buy gold when the price is rising, with Asian buyers moving in when prices turn down. But as this chart makes clear yet again (I published it twice in March), Western investors (as represented by the black line showing gold held in the major gold-backed ETF GLD) have been selling gold for the last two weeks, aside from a slight uptick yesterday.

The novelty of this gold move raises questions. Biggest among those questions is: will Western investors participate in their normal ways in a gold bull market that isn’t theirs? This matters because this newsletter is about investing in gold stocks. I’m sure we all own some gold metal as well, but here we talk about how to make money investing in gold stocks. And neither the PBoC nor young Chinese savers are going to put a single yuan into gold equities.

That capital is going to have to come from Western investors, who usually invest in gold stocks when their buying is sending the gold price higher. In these normal setups, the buying of physical and stocks goes hand in hand. Today’s run is different – Western investors are seeing the gold price rise without any of the Everyone’s Buying Gold! coverage that usually accompanies a gold run, which means the idea of gold stocks isn’t forward in the west. Heck – it remains barely present, even with gold at a new record price.

Instead, there’s endless conversations in financial media about gold and interest rates and volatility and inflation. I shouldn’t poke fun at those because I too stayed focused on those relationships until very recently…but I will admit I laughed when I read the following argument for gold continuing to rise: that gold is correlated with volatility, which must increase soon cause it’s so low (it must mean revert), so when it does start rising gold will follow it up and hit $3000 per oz. The argument, which was relayed in a Bloomberg opinion piece, was based on the chart below showing gold in blue, VIX (the volatility index) in white, and the VIX moving average also in white.

I include this ‘argument’ as an example of how the Western investing world doesn’t yet understand or know what to do about gold’s run.

I understand why gold is running. And articles like the Strait Times one I quoted at the start are giving me confidence the run has staying power. Were it only the PBoC buying, I would be more hesitant; while there are lots of reasons to think China’s central bank still wants to own more gold, there’s no way of knowing how much more and how long this period of intense buying will last.

But significant gold buying momentum within Chinese retail does have staying power, given the context (real estate not working, sliding volatile stock market, deflation all around, and low interest rates in China all argue for buying gold).

Chinese buying has been strong enough to lift gold to new all-time highs. It’s pretty easy in this moment to convince myself that this run isn’t over yet, given the retail gold craze and continued PBoC buying (for now at least).

A very strong chart taking gold to record heights has attracted some Western investor interest to gold. A few of the stocks in the Maven portfolio have levered gold’s recent gains very well.

For a more sector-wide view, we can use GDX, the ETF of gold miners, and GDXJ, the ETF of ‘junior’ gold miners (really mid-tiers and majors, versus majors only in the GDX).

This 16-year chart of the GDX doesn’t make the last month look like anything. However, GDX is up 29% since gold started its 14% ascent on Feb 28 while the GDXJ is up 32% in that time.

Those are nice moves in a short time that represent 2X leverage to gold.

The rule of thumb is that big gold stocks (which includes mid-tiers and majors) should hand out 3X leverage to gold’s gains in a bull market. So 2X is good, but not there yet. Being ‘not there yet’ is also apparent when you look at a two-year chart – the latest move doesn’t stand out (yet?) for height reached or intensity of ascent (we saw similar at this time of year in 2022 and 2023).

A bull market doesn’t look like a bull market on charts until it’s well on its way. And it takes time for a rising gold price to generate momentum in gold stocks when they have struggled for so long because lots of investors dump their long-suffering holdings into early gains to just get out. It takes time to churn through that selling.

For those reasons, the lack of performance from stocks is not an argument that this isn’t a bull market. (If stocks were gaining nicely and offering 3X leverage to gold, we would use it as proof of a bull market, but I digress…) It’s just me paying attention to the stock side of this gold move because it’s the part where I need to see volume and better gains before I will be fully convinced that this robust gold move will generate gold stock gains in the way we want and have seen before.

That I’m not fully convinced isn’t stopping me from leaning in though!

Momentum matters, always and especially in a new bull market. You can lean into new momentum. Don’t be afraid to buy stocks simply because they have already moved, for two reasons:

• The ones that haven’t moved yet might not move for a while yet (they’re awaiting trickle-down interest). Yes, there’s more upside in a still-rock-bottom junior…but I don’t know when investors will move into juniors. For now, medium to large stocks are the active game so that’s where I want to play.
• In the overall stock market, momentum stocks have outperformed everything for the last few years. This is because of passive investing and because it has simply worked so well. Momentum shouldn’t dissuade you; it should encourage you at this stage of a new bull market.

My plan is to lean into first-and-most stocks while maintaining exposure to discovery potential stocks. And I will hold what I’ll call my Gold Value Stocks because they should move next…though I don’t know how soon that ‘next’ will happen. If you want to know the details of my portfolio you can subscribe to the Maven Letter here.

Should I have a raft of new Buy suggestions because the market is (finally) moving? No. We’ve been preparing for this for a long time. Now is the time to enjoy some positive movement in your stocks and add to the ones showing the most life. We have our rationales; now let’s watch them play out…assuming Western investors do indeed get interested in gold stocks with gold rising like it is!