Economic & Market Review - August 2013

by Gavin Graham, Chief Strategy Officer August 30, 2013
Notice: This newsletter is intended as a general financial market outlook, and should not be relied on as investment advice.
IS REBOUND IN PRECIOUS METALS FORECASTING INFLATION?

The recent sharp rebound in the price of gold and silver, after a tumultuous first half of 2013, has left many observers wondering whether this is anything more than a “dead cat” bounce. While gold itself is only up 3.1% in the last month, silver, often called the poor man's gold, and more volatile, has risen by an astonishing 12.7% and many gold mining stocks are up more than 6%. Eldorado Gold is up 16.8% in the last month, Barrick, the largest gold miner has risen 12.7% and Agnico-Eagle, Goldcorp, Franco Nevada and Yamana Gold are up between 4.9% and 6.9% in the same period. The ETF representing junior gold miners, the BMO Junior Gold Index ETF is up 10.9% and the iShares S&P/TSX Global Gold Mining ETF is also up 8.8%.

Of course, this merely reduces the losses that gold, silver and gold mining stocks have suffered so far this year and over the last year. Gold is down -18% this year and -17.3% over the last twelve months and silver -24.2% and -23%. Meanwhile the gold miners have also been suffering, with the iShares Global Gold ETF off -32% and -34.6%, and the BMO Junior Gold Miners ETF down -34.5% and -37.8%. How individual gold stocks have fared has depended upon how low their mining costs are, which gives the lower cost producers some buffer against falling prices and whether they have stumbled in bringing new projects on line. Thus Barrick, down -40.9% and -44.8% year-to-date and over one year, and Detour Gold, off -52.8% and -55.7% have done worse than the index, while Goldcorp (-12.6% and -20%), Yamana (-28.5% and -25.5%) and Agnico-Eagle (--36.7% and -26.7%) have done better.

The reasons for gold's poor performance over the last year have been many and varied. As economies in North America and Europe began to recover, the need for disaster insurance against such possibilities as the break-up of the Euro-zone has receded. As central banks announced that they were prepared to start reducing the amount of Quantitative Easing (QE) they were providing to support bond markets, investors began to worry less about this monetary expansion leading to inflation, against which gold is perceived to be a suitable hedge. As the price of gold fell, short term traders, including numerous hedge funds, sold down their positions in such gold plays as the SPDR Gold ETF, which saw the amount of money invested in it fall by over one third during 2013. Finally, the Indian government raised import duties on gold, traditionally valued as a store of wealth by Indian investors, the largest individual investors in gold, at the same time as the Indian rupee was sliding to record lows against the US dollar, increasing the price in rupee terms even as the US dollar price was falling.

Nonetheless investors should remember that over the last 5 years to the end of July 2013, which comprises the strong bull market that has brought stock markets back to their all time highs, gold has returned 7.4% p.a., beaten only the NASDAQ, up 9.3% p.a. and the Salomon US Corporate Bond Index, up 7.8% p.a. Gold has beaten the S&P 500, up 5.9%, a traditional global balanced fund (60% MSCI World Index, 40% Barclays Cap Global Bond Index) up 5.7% p.a. and the MSCI World Index up 4.9% p.a. As for the S&P/TSX Composite, it is actually down over the same 5 years, off -1.7% p.a.

Looking back over the last decade, which includes two bull markets, with, admittedly, one of the worst bear markets of the post-war era included, gold has actually been the best performing asset, up 14% p.a. To the end of July 2013, the next best performer was the MSCI Emerging Markets Index, up 9.9% p.a., with developed markets represented by the MSCI World Index up 8.2% p.a., the NASDAQ up 7.7%, the Salomon Corporate Bond Index up 6.3% and the S&P/TSX Composite and S&P500 up 5.6% p.a. and 5.5% p.a. respectively.

Therefore, despite its recent woes, investors should not forget to consider including an exposure to the precious metals in their portfolios. In Canada, holders of the S&P/TSX Index have over 10% exposure to precious metal stocks, so that just by holding a basic ETF, they will have a meaningful gold position.

Source: Bloomberg.com current as of August 22nd, 2013