With geopolitical tensions on the rise, civil protest and unrest brewing in American coastal states, cost of living rising and economic uncertainty infiltrating most western nations, gold has been among the best asset classes thus far in 2017. Despite the headlines and fanfare “Dow 20,000” has generated, U.S. equities are significantly underperforming the precious metal and gold stocks this year.
The Dow Jones Industrial Average is up approximately 2.5% year to date. We aren’t discrediting what would amount to an annualized double digit return for the Dow; however, gold is up roughly 6.7% year to date.
After being crushed in 2013 and 2015, gold may be poised to put together a multi-month rally, akin to what we saw commence in early 2016.
Druckenmiller Steps Back Into Gold
Prominent billionaire investors have been accumulating gold since around mid-January. Some of the big name investors now accumulating are the same people who sold the precious metal leading up to, and after, Trump’s victory…
Do they see something others do not?
They are seeing exactly what we have been writing about for the last few weeks: currency devaluation coming from the U.S.
Stanley Druckenmiller dumped his entire gold position after Donald Trump was elected. Now, in a drastic change in sentiment not even one month into Trump’s presidency, Druckenmiller has loaded up on gold…
It’s the WHY of Druckenmiller’s purchase that should please long-time gold investors. In respect to his acquisition of the precious metal, he stated:
“I wanted to own some currency and no country wants its currency to strengthen.”
Druckenmiller is a 30-year hedge fund manager (and billionaire investor) who now only manages his personal money and views gold as a currency. He is the same financial titan who just in November of 2016, after Trump’s historic victory, stated on CNBC he’s “quite, quite optimistic” about the U.S. economy.
On November 10, 2016, Druckenmiller told CNBC, “I sold all my gold on the night of the election…”
So why is Druckenmiller getting back into the gold market within 60 days of his bullish comments on the U.S. economy?
In a global currency war, the first to the bottom wins. And Trump has let the world know, via press conferences and tweets, he doesn’t plan on just playing, but winning the currency war. Just this past Friday, as Japan’s Prime Minister Shinzō Abe stood beside him, Trump proclaimed that the U.S. dollar would soon be on a “level playing field” as it relates to trade with China and other nations. Translation: if they want to devalue, so will we…
Druckenmiller and other leading money managers understand this all too well. They are diversifying by hedging their bets with gold against a potential weakening U.S. dollar.
More on Drunkenmiller…
With an estimated net worth of $4.4 billion in January of 2017, Stanley Druckenmiller is known for founding the asset management firm Duquesne Capital in 1981. He closed the fund to new investors in 2010 despite having $12 billion of assets under management.
According to InsiderMonkey.com, Duquesne Capital is regarded as one of the best hedge funds averaging an annual return of almost 30% and just having five down quarters in a period of 120 quarters.
U.S. Equities vs. Gold
U.S. equities were the leading asset class for years (2012-2016) as major American exchanges continually climbed following the Great Recession lows hit in March of 2009. Perma-gold bulls were left holding dead, illiquid stocks for nearly half a decade, but that all changed around this time last year.
“Gold miners posted the best 2016 performance across our ETF universe, whether judged on an absolute or risk adjusted basis, and the options market is pricing in another big year for volatility for the VanEck Vectors Gold Miners ETF GDX, and the VanEck Vectors Junior Gold Miners ETF GDXJ,” according to Goldman Sachs’ analysis.
“According to Goldman’s analysis, the Gold Miners ETF could see a swing of as much as 34% in the coming year-either to the upside or the downside-while the Junior ETF, which focuses on small-cap companies in the space, could see a move of 44%.”
With Trump pulling out all the stops to entice manufacturing in America (Intel’s CEO was courted by the Trump Administration and on Wednesday announced a $7 billion dollar investment in Arizona), to his plans on delivering something “phenomenal in terms of tax” over the next 2-3 weeks, the markets are euphoric. But why then is gold doing so well? The precious metal typically performs strongly when US stocks are soft. Why is the GDXJ up nearly 32% since the beginning of the year?
Gold Stocks in 2017
Forget about the Dow (up 2.5% YTD) or even gold (up roughly 6.7% YTD), it is gold stocks which have been the biggest winners thus far in 2017.
With the headquarters of Pinnacle Digest located in Vancouver, you could say we have direct and immediate access to the very heart of the junior gold mining sector…
A few weeks ago, Alexander Smith, Head of Market Research at Pinnacle, had the chance to attend several investment presentations and private meetings in Vancouver at the annual Mineral Exploration Roundup.
The annual event and conference brings together geoscientists, prospectors, investors and industry suppliers to share ideas that ultimately shape the future of mineral exploration and development. The topic of “Peak Gold” came up in one of his private discussions, as the CEO of a mid-sized junior (approximate $75 million market cap) explained that senior producers are on the lookout for new discoveries and advanced, viable assets.
We wrote about the theory of ‘Peak Gold’ back in 2015, the year this concept was included in a Goldcorp presentation. Below is an excerpt from the Weekly Volume titled Peak Gold in 2015?:
“Statistically, the world hit a peak in gold discoveries (based on new ounces discovered in a calendar year) in 1995, according to a recent Goldcorp PowerPoint. For twenty years now we have seen a steady downtrend in ounces discovered annually. It has gotten so bad that in 2013 we only discovered approximately 10% of what we did in 1995, according to Goldcorp. That’s a shocking statistic.
World Prepares For Peak Gold Production: Discoveries Decline
While the decline in discoveries takes time to put pressure on production, and the world has several mediocre deposits (need roughly $1,400 an ounce to make money) waiting for a major to scoop them up, some market forecasters expect the world to hit ‘Peak Gold’ production this year. Take a look at the chart below provided in a Goldcorp slide show and cited by ZeroHedge which documents this point perfectly:
A report released in January by the GFMS team at Thomson Reuters is estimating the supply of gold declined in Q4 of 2016. This made 2016 the first calendar year gold production has fallen since 2008. Without several massive discoveries (3 million + ounces) in the next 3-5 years, Peak gold is reality.
“there are relatively few new projects and expansions expected to begin producing this year, and those in the near-term pipeline are generally fairly modest in scale, hence our view that global mine supply is set to continue a multi-year downtrend in 2017.”
Byron King from the Daily Reckoning told an interesting story in one of his latest articles titled, China’s Demand for Gold Can’t be Met.
King’s friend, who has been in the gold business for over 45 years, explained that the Shanghai Gold Exchange has over 10 million customers. Below is an excerpt from Byron’s article:
“While we were talking, I did some quick math in my head. Suppose the average customer, a middle class Chinese worker, has about $2,500 socked into gold. At $1,250 per ounce, that’s the equivalent of about two ounces of gold.
That’s 10 million clients, each with an average of two ounces, for 20 million ounces of gold. That’s the equivalent of adding up the annual production, in 2015, of the four largest gold mining companies on the stock market – Barrick Gold, plus Newmont Mining, plus AngloGold Ashanti, plus Goldcorp.”
China was the largest gold producer in the world in 2015, accounting for around 14% of total global production. It will be the largest again in 2016, and likely for the foreseeable future. Asia as a whole produces 23% of all newly-mined gold. This gold does not leave Asia. The rest of the world has to fight over the remaining 77%.
Major gold producers and most money managers know the world economy is a political tinderbox, ready to catch fire at any moment. The more than 6-year Syrian war continues to escalate as geopolitical tensions between Russia and Turkey rise. Russia took the blame for an accidental airstrike on Thursday that killed three Turkish servicemen and wounded another 11.
Iran has remained defiant in the face of new sanctions by the Trump Administration, launching a new missile just days after being implemented. Although Trump just officially recognized the “one-China Policy,” while in Japan his Defense Secretary James Mattis stated the US would defend Japanese islands claimed by China. Just days after Mattis’ visit to Japan, China showed off a new advanced missile government officials claim can hit regional rivals India, Japan, and Taiwan.
These tensions, along with weak global economic growth, are driving insecurity in many markets and pushing investors into the safety of gold. With majors looking to secure future reserves in safe jurisdictions, we expect an increase in M&A activity and for juniors to continue to be revalued upwards.
All the best with your investments,
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