Gold Comments/Market Strategy from Canaccord Martin RobergePortfolio Strategy | Mid-Week Market Observations (Gold equities) - Martin Roberge
Healthy correction or end of the bull mkt for gold & gold equities? The former remains our baseline scenario. Gold(s) were shellacked yesterday. Reasons for the rout revolve around rumours that the ECB may taper its asset purchase program, Fed officials talking up rate increases, and sources that BoJ was setting its monetary policy on the yen, not inflation. The latter point bears some credence considering that only a further strengthening in the yen will in our view trigger a BoJ policy easing. Given the strong inversed correlation between the yen & the gold bullion (Figure 1), and the failure of the USD/JPY to break below the 100 support, investors sold the yen & gold(s) in sympathy. A crowded trade. Following the doubling in gold shr prices from January to July, the group became severely overbought. Gold & gold equities had become a hedge against negative interest rate policies (NIRPs), Brexit, Deutsche bank, and politicians. Unsurprisingly, speculators bought gold bullion exposure to their eyeballs & net spec positions reached 40% of the open interest (nearly matching 2009 highs) just two weeks ago (Figure 2). Those long positions are now being liquidated. In July, we warned investors about a possible summer correction. We are now in the eye of the hurricane. The 1993 analogy. Our baseline scenario of a correction in gold & gold equities comes from our mkt memory of 1993. This was our first yr in the business. Back then, gold equities began a multi-year bull mkt when real Fed fund rates turned negative for the first time since the late 70s, a bullish episode for gold(s). As Figure 3 shows, from January to July 1993, the S&P/TSX gold index doubled & then plunged 25% over the summer. Fast forward 23 yrs & the same dynamic appears to be unfolding. The S&P/TSX gold index returned 111% from January to July & we have just seen a 26% correction from the July peak. Now, if the 1993 roadmap holds, we have seen the bulk of the liquidation in gold equities. Not only could we see stks recouping their summer losses but the group could push to new-year highs later this yr. The rally in the S&P/TSX gold index from the 1993 summer low through the end of the yr was 40%. Near-term risk & opportunities. More than 72M shrs traded on the 3x Bull US Gold Miners ETF yesterday. This is the fourth largest volume day since the index was created in 2011. While yesterday could qualify as a panic-selling day, it does not mean that gold(s) could not fall further. After all, as we wrote in previous wires, we believe US 10-year bond ylds are headed to 1.9%. Also, we believe the third gap on the GDX-US will be closed at ~$23, which is exactly the 200-day avg. We could break through this key support if our view on bonds is right. **However, we want to be a progressive buyer down here as the gold trade switches from a US dollar to an inflation play. Many investors are skeptical about this relationship but Figure 4 shows that there is a positive correlation between gold(s) & US headline inflation. We calculated that if oil prices reach $50/bbl in March next yr, US total CPI will hit 2.2% (2.9% at $60/bbl), all else being equal. As such, real bond ylds should turn negative early next yr, usually a bullish development for gold(s). Little damage on golds’ quant screens? Following yesterday’s rout, we updated the Quest® triangle score for gold equities. Results appear in Table 1. As we can see, 22 out of 31 Cos still carry a 9 or 10 rtg. While “momentum” has gone down, most gold equities hold high “value” and/or “quality” scores. Last, the relative strength index for most Cos sits below 30 in the oversold territory. As such, in light of the technicals & fundamentals above, time has come to adopt a buy-on-dip strategy.