Why these stocks gained during the panic selling

Tuesday, 6 August 2019
Adelaide, Australia
By Bernd Struben

  • Bucking the trend
  • And the RBA…

‘Worst day of the year’, proclaims the headline in today’s The Age.

Indeed, with the ASX boards shedding nearly $38 billion, yesterday was a day most investors would happily have given a pass.

And it continues today.

At time of writing, the ASX 200 is down 2.3%. That compares to a 1.9% loss yesterday. Unless there’s an uptick in the final half hour of trading, today will take up the mantle as the new ‘worst day of the year’.

Only last Tuesday investors were warily celebrating the ASX 200’s new record high. It took more than 11 years to get there. And just five days to tumble back 5.2%.

If misery loves company, though, you can take heart.

As you’ll see in the markets section below, every major index across the globe is haemorrhaging funds. Technology stocks took some of the biggest hits, which saw the NASDAQ plummet 3.5%.

While you run your slide rule through your own portfolio, spare a thought for the poor wealthiest 500 people on Earth. According to Bloomberg, the elite group lost US$117 billion, or ‘2.1% of their collective net worth’ on Monday.

Amazon’s Jeff Bezos led the losers. He was down US$3.4 billion at market close yesterday (overnight Aussie time). With $110 billion to his name, he’s still the world’s richest person. But that kind of loss has got to sting.

Bezos and his 499 richest friends would have done well to simply pay China $30 billion to compensate for Trump’s latest round of tariffs (10% on $300 billion of goods). Then China might not have felt compelled to devalue its yuan. A move that drove — and continues to drive — the panic selling.

The People’s Bank of China enabled the yuan to slip below its seven to the dollar peg. This is its weakest level versus the dollar since 2008.

While this can help mitigate the impact of the US tariffs, it also diminishes the purchasing power of Chinese businesses and consumers. Meaning the looming currency war could impact Chinese demand for most everything Australian. Think iron ore, education, and fancy travel packages. Not to mention Chinese property investors.

Trump was quick to label China’s move ‘a major violation’. And the US Treasury Department got the message. As Bloomberg notes:

Under the manipulator designation, Treasury Secretary Steven Mnuchin “will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions,” the department said in a statement.

But the major selloff that ensued is a good reminder that the stock market is just that…a market of stocks.

While there were many, many losers, a number of stocks in one particular sector bucked the trend to post gains.

Any guesses?

If you said gold stocks give yourself an…erm…gold star.

More, after a look at the markets. Brace yourself…

Markets

Overnight, the Dow Jones Industrial Average closed down 767.27 points, or 2.90%.

The S&P 500 closed down 87.31 points, or 2.98%.

In Europe the Euro Stoxx 50 index finished down 65.19 points, or 1.93%. Meanwhile, the FTSE 100 fell 2.47%, and Germany’s DAX closed down 213.93 points, or 1.80%.

In Asian markets Japan’s Nikkei 225 is down 201.82 points, or 0.97%. China’s CSI 300 is down 2.01%.

In Australia, the S&P/ASX 200 is down 149.50 points, or 2.25%.

West Texas Intermediate crude oil is US$54.24 per barrel. Brent crude is US$59.43 per barrel.

Turning to gold, the yellow metal is trading for US$1,468.83 (AU$2,168.02) per troy ounce. Silver is US$16.45 (AU$24.28) per troy ounce.

Precious metals aren’t the only assets soaring in this tanking market.

At time of writing, one bitcoin is worth US$11,773.12. That’s up 7.3% since I wrote to you yesterday. And it’s up 23.9% since last Tuesday, 30 July. That’s no surprise to our in-house crypto pros, Sam Volkering and Ryan Dinse. You can stay up to date with all their latest investment advice here.

In the world of fiat currencies, the Aussie dollar continues its slide into decade lows. One dollar is worth 67.75 US cents.

Bucking the trend

As mentioned up top, the gold sector is one of the few to shine brightly during this week’s bloodletting.

Bullion gained 1.7% in US dollars since I wrote to you yesterday. And it’s up 2.1% in Aussie dollars, as our dollar continues to slip against the greenback.

We’ll look at how that’s playing out among some of the miners in a moment. But first, a nod to the losers.

It’s not just the US technology giants taking a beating. Australia’s tech darlings are in free fall as well.

While the US has its FAANG stocks (Facebook, Apple, Amazon, Netflix and Google), Australia has its WAAAX stocks. Namely WiseTech, Afterpay, Altium, Appen and Xero.

And all the coveted WAAAX stocks lost heavily yesterday.

Appen shareholders suffered the most, with the share price down 10.6%. At time of writing, it’s down another 5.8% today.

While Xero ‘only’ lost 3.4% yesterday, it’s down 7.6% in intraday trading today.

As for the much hyped Afterpay, it lost 7.8% yesterday and is down another 5.8% today. Though it’s worth noting that Afterpay would need to fall another 50% to give back all of its phenomenal 2019 gains.

Leaving the gloom behind, let’s return to gold.

The surging price has proven a boon for bullion exchange traded funds (ETFs) like BlackRock’s iShares Gold Trust. As Bloomberg reports, ‘holdings in … the second-largest bullion-backed ETF, had already climbed to a record’ before the latest escalation in the trade and currency war.

As you can see in the chart below, it’s been a month since there was an outflow from iShares Gold Trust:



chart image
Sources: BlackRock / Bloomberg
Click to enlarge

Not surprisingly then, gold’s continued strength saw a number of gold miners buck yesterday’s panic selling.

Evolution Mining, for example gained 1.9% yesterday, while the All Ords lost 2.0%.

Resolute Mining also closed in the black, up 4.3%.

And while there’s been some profit taking today — alongside news China may not devalue its currency as much as feared — shares in St Barbara are up 1.1% so far this week…while the All Ords are down 3.9%.

Meanwhile, in US markets, some of the gold juniors really outperformed.

Osisko Gold Royalties Ltd gained 9.6% on the NYSE overnight our time. And Alamos Gold Inc rose 7.8%.

While the smaller end of the market comes with greater risks — gold juniors can and do fail more often than you might think — these small gold stocks also offer up the biggest potential rewards.

That’s why Greg Canavan spent many long days…and nights…sorting through the long list of Aussie listed gold juniors. He found plenty of duds likely to lose you money.

But he also uncovered four little known gold stocks he’s convinced are the best way to make the most out of the new gold bull market.

All four stocks have gotten off to a great start since he recommended them in early July. But Greg sees a lot more gains in their future.

You can get all the details in Greg’s white paper here.

And the RBA…

Held rates at the current record low 1.0% at their meeting this afternoon.

Though comments from governor Philip Lowe signal we can expect the cash rate to come down from here.

As quoted by the AFR, Lowe said in his post-meeting statement:

It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target.

The board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.

With the trade war getting dialled up to 11, and the US Fed almost certain to cut rates again, I reckon the need to support sustainable economic growth will see the Aussie cash rate cut to 0.50% before year’s end.

And that, folks, should only help drive gold’s run higher.

Cheers,
Bernd