Gold & Gold Miners Benefit From Trump-Fueled Uncertainty
The president’s unpredictability and Twitter outbursts have inevitably engendered quite a lot of market uncertainty, which, as you know, investors don’t like. This has prompted several big-name hedge fund managers to weigh in.
One such manager is value investor Seth Klarman, who oversees $30 billion as head of Boston-based Baupost Group. He tends to be media-shy, but Klarman is no slouch. In the last 34 years, he’s lost money in only three. He’s one of the very few money managers to receive open praise from Buffett himself.
Anyway, in his annual letter to investors, Klarman raised concerns that Trump’s protectionist policies and deep tax cuts could seriously hamper economic growth, both domestically and abroad, by isolating the U.S. from global trade and adding significantly to the already-bloated national debt.
“Exuberant investors have focused on the potential benefits of stimulative tax cuts, while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers,” he wrote. You can read more of Klarman’s letter over at Andrew Ross Sorkin’s DealBook.
Managers at hedge fund firm Carlson Capital, which controls over $8 billion, share many of the same concerns, telling investors recently that Trump’s trade policies could “cause a global depression and a major equity market decline.”
Even for some money managers who were initially excited by Trump—Ray Dalio and Jeff Gundlach among them—reality is beginning to set in.
Gold Gains on Uncertainty
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Last year, central bank policy and negative real interest rates drove the gold rally. This year, it seems to be uncertainty over Trump and other antiestablishment leaders, which is convincing the smart money to make wagers on the yellow metal, often seen as a safe haven during shaky times. So far in 2017, it’s up close to 7 percent, compared to the S&P 500’s 2.6 percent. In fact, if you compare this year’s price action to last year’s, they look remarkably the same, with a dip in December before the Federal Reserve raised rates. Although past performance is no guarantee of future results, gold could gain another $100 an ounce this year if it continues to follow the same trajectory.
Among those who are bullish on the yellow metal is Stanley Druckenmiller, the legendary hedge fund manager who dumped his gold the same day he learned Trump had been elected. Before that, it was the number one holding in his family office account. Now he’s back, telling Bloomberg he “wanted to own some currency and no country wants its currency to strengthen. Gold was down a lot, so I bought it.”
Higher demand has been good for both junior and senior gold miners, which recently crossed above their 200-day moving averages.
The NYSE Arca Gold Miners Index was up for an incredible seven straight days ended Monday, while the MVIS Global Junior Gold Miners has made positive gains in eight of the nine previous days.
Germany Brings Home More of Its Gold
Hedge fund managers aren’t the only ones whose demand for gold is strong. For the sixth straight year, central banks continued to be net importers of the metal in 2016, with China, Russia and Kazakhstan leading world consumption.
Although it might not have purchased any gold in 2016, the Deutsche Bundesbank, Germany’s central bank, ramped up its repatriation program, bringing home some 216 metric tons from vaults in New York, according to the Wall Street Journal. In 2011, former Fed Chair Ben Bernanke said central banks held gold simply because it’s tradition. I think the reason goes much deeper than that. Gold is money—it has been ever since the first gold currency appeared in China more than 3,000 years ago—and Germany’s efforts are proof of that.
The Market Vectors Gold Miners ETF (NYSE:GDX) was trading at $25.03 per share on Monday afternoon, down $0.26 (-1.03%). Year-to-date, GDX has gained 19.65%, versus a 4.14% rise in the benchmark S&P 500 index during the same period.
GDX currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #19 of 33 ETFs in the Precious Metals ETFs category.
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The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
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 MVIS Global Junior Gold Miners Index includes companies that generate at least 50% of their revenues from (or, in certain circumstances, have at least 50% of their assets related to) gold mining and/or silver mining or have mining projects with the potential to generate at least 50% of their revenues from gold and/or silver when developed. Such companies may include micro- and small-capitalization companies and foreign issuers.
The NYSE Arca Airline Index (XAL) is an equal dollar weighted index designed to measure the performance of highly capitalized companies in the airline industry. The XAL Index tracks the price performance of major U.S. and overseas airlines.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2016: Delta Air Lines Inc., American Airlines Group Inc., United Continental Holdings Inc.
About the Author: Frank Holmes
Frank Holmes is the CEO and chief investment officer of U.S. Global Investors. Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal, and in 2011 he was named a U.S. Metals and Mining “TopGun” by Brendan Wood International. He is also the co-author of The Goldwatcher: Demystifying Gold Investing. More than 30,000 subscribers follow his weekly commentary in the award-winning Investor Alert newsletter which is read in over 180 countries.
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