Gold bugs and non-gold bugs are puzzled over the apparent disconnect between gold prices, gold mining stocks and stock market bullishness.
But even if sky-high investor bullishness can't lift gold prices, a move might come at the hands of
Swiss voters next week, when they will decide whether the country's central bank will be required to keep a fifth of its assets in the precious metal.
Some predictions forecast that if the referendum passes, gold prices could spike by as much as 18% to more than $1,350 an ounce.
Even though such a move would likely satisfy frustrated gold investors, it still wouldn't answer the question of why gold prices have been flat this year in U.S. dollar terms while so much geopolitical chaos and financial market risk makes the case for higher gold prices.
“Right now, everybody believes the same story, and that's how you get to a place like this,” said Janet Briaud, founder of Briaud Financial Advisors. “Nobody is interested in gold with the stock market going crazy like this, and we're also in a world where it seems like the Fed has got your back. The narrative is that there is no risk out there.”
Ms. Briaud isn't buying the narrative, but she is buying gold. Over the past few weeks she has increased her client allocations to gold to 7.5%, from 5%.
“I think gold is cheap and there are a lot of scary things out there right now,” she said.
Keith Trauner, manager of the GoodHaven Fund (GOODX), is not necessarily focused on gold prices, but he has noticed the way some mining stocks are trading at steep discounts to physical gold. And he knows that mining stocks benefit when gold prices climb.
“What intrigues us today is that monetary authorities around the world are trying to cheapen currencies and create inflation, and if they're successful, gold should do pretty well and if they're unsuccessful, gold might do OK,” he said.
With that in mind, Mr. Trauner feels comfortable with his investment in a mining company stock such as Barrick Gold Corp. (ABX), even though the stock price is down 32% this year, following a 48% drop last year.
The mining stocks are “an interesting place to look because the price of a lot of companies in the area are down a lot, but in dollar terms gold has been even over the past year,” he said. “It sort of suggests something is out of whack, and it's really about the disconnect between the metal price and price of the mining-company securities.”
Ms. Briaud typically gets her gold exposure through the SPDR Gold Shares ETF (GLD), but said she will occasionally invest in mining stocks through the Market Vectors Gold Miners ETF (GDX).
GDX is down 18.6% since the start of the year, and fell by 54% last year.
“If gold goes up, gold-mining shares should do fine,” Ms. Briaud said. “If somebody really wants to take a risk, that makes a lot of sense.”
Another way to approach the mining space during these times of uncertainty would be the Sprott Gold Miners ETF (SGDM), which is a smart-beta strategy that has outpaced GDX by 4 percentage points since it launched in May.
As with any smart-beta strategy, it's all about the methodology. In this case, Sprott Inc. executive vice president John Ciampaglia explained that the focus is on revenue growth and leverage levels.
“You end up getting an index that looks a lot different than the cap-weighted version,” he said.
The focus on revenue helps distinguish which mining companies are producing each quarter, and leverage is an important factor in a capital intensive industry like mining, which can make companies more vulnerable in down markets, Mr. Ciampaglia explained.
The fund's smart-beta strategy puts Franco-Nevada Corp. (FNV) as the largest holding in the ETF. Franco-Nevada shares are up 37% from the start of the year, rebounding from a 27% decline last year.
Barrick Gold, which is among the largest positions in the market-cap-weighted GDX ETF, is among the smallest positions in the Sprott ETF.
