This Defensive Asset Is Back in Vogue

Wednesday, 19 May 2021
Wollongong, Australia
By Greg Canavan

[3 min read]

The gold market is heating up again…

Last week, I added a new beaten down gold stock to Greg Canavan’s Investment Advisory portfolio. It was just in time too. From last Thursday’s close to yesterday’s close, the stock is up 10%. Not bad for a large-cap gold producer.

It’s looking increasingly like the cyclical bear market in gold is over. This is what I wrote to members earlier today…

And now, as I explained in last week’s report, things are looking better for gold. The downtrend may be over…

As you can see in the chart of the US dollar gold price below, after making a double bottom in March, the price has bounced strongly. The 50-day moving average (MA) is about to cross above the 100-day MA. This suggests momentum is moving to the upside.

Port Phillip Publishing

Source: Optuma

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There’s another way to look at the recent move from a charting perspective. That is, gold looks to have broken out of a rather large consolidation pattern. You can see this in the chart below. Gold broke above this downward sloping trend line in January. But selling followed immediately.

This time around, you’ve seen follow-through buying, which is a bullish sign.

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Here’s another interesting chart regarding gold. Can you guess what it is?

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

What do you think?

It’s gold relative to bitcoin. Think of it as a gold/bitcoin exchange rate.

For the first time since September last year (before bitcoin went on its massive run), the gold/bitcoin exchange rate has traded above its 50-day MA. That follows months of gold holding its own against bitcoin.

With bitcoin now trending down, and gold trending higher, my guess is the gold/bitcoin exchange rate has some way to run.

What’s driving the resurgence in gold?

It’s simple really. As I’ve explained in The Insider previously, the main determinant of gold prices are real US interest rates. That is, the nominal rate of interest minus inflation. With the recent pick up in inflation readings, and the fact that nominal long-term bond yields haven’t increased by as much, real yields have been falling into negative territory again.

The more negative they go, the higher the gold price will rise.

As I’ve also said before, this is the playbook of governments and central banks around the world. With debt at such large levels, the only way the economy can handle it is with negative real rates. As soon as real rates move into positive territory, it acts as a brake on growth.

That’s how sick the global economy really is.

So with rates moving into negative territory again, why isn’t bitcoin moving higher too? I just think the price got ahead of itself. A huge speculative run saw it triple in a few months. Much of that buying was purely momentum. Those buyers are now panicking out.

But it will find a floor at some point, consolidate, and start moving higher again. It’s in the price discovery phase. It’s going to be volatile as absolute belief in its qualities gives way to doubt and fear.

Getting back to gold though…

While it’s all starting to look pretty good, there are some pressures starting to creep in. This is not just about gold actually. It’s the mining industry as a whole. And Western Australia seems to be at the forefront of these pressures once again.

As the Financial Review reported yesterday, gold miner St Barbara Ltd [ASX:SBM] is feeling the pinch…

One of the nation’s biggest gold producers is counting the cost of labour and skills shortages hitting the mining and farming industries in Western Australia.

St Barbara Ltd slashed full-year production guidance for its Leonora operations in WA to 150,000-160,000 ounces on Tuesday, down from 175,000 ounces.

The latest downgrade could cost St Barbara up to $US46.7 million ($60 million) based on today’s gold price of $US1868 an ounce and only hitting the lower end of revised guidance.

And just a few days prior to that, global mining serving company Perenti Global Ltd [ASX:PRN] revealed a downgrade in part due to Australian labour shortages. From its ASX release:

In Australia during the third quarter of FY21, it has become apparent that demand for domestic labour has increased. This is resulting in higher turnover and wage growth, which is affecting margins. We continue to develop and deploy specific initiatives with the aim of maintaining a high-quality team. Notwithstanding these labour market challenges, we are confident that Perenti and our employee value proposition positions us well to source and maintain appropriate personnel levels to deliver on our current and potential future contract requirements.

Well-managed businesses will be able to deal with these price pressures better than others. But once it sweeps through a sector, it’s going to have an impact no matter how well run the business is.

With gold miners, hopefully the rising price can largely offset any short-term cost pressures.

But if you’re holding miners, or mining services businesses with exposure to Australia (and especially WA), it’s worth keeping in mind.

This is where our portfolio management tool can help. I mentioned it on Monday. One of its features is a ‘portfolio risk rebalancing’ tool. If you’re overexposed to a certain stock, it will provide weighting advice depending on the stock’s volatility and risk.

That way, if there are nasty surprises in store for some of your stocks, the hit will be manageable.

To see what it’s all about, click here.