Gold is up more than 15% this year so far, while the gold stocks (per XAU index) have risen over 50%. But investors are skeptical about this year’s gold rally, and that’s a good thing. For the past several years, we have seen a strong rally in gold and gold stocks early in the year, only to see the market reverse and end the year down. Investors are reluctant to jump on board this year’s rally.
There are certainly reasons to think that gold could correct. After all, we have seen a very strong rally, with the strongest February on record; it would be foolhardy to expect that to continue without a pause. And the first quarter is seasonally strong, with the April to June period typically soft. Moreover, the speculative net-long positions on the COMEX have increased vastly in recent months, and thus are vulnerable to profit taking.
The gold rally is stronger than previous first-quarter rallies, but there are strong reasons for thinking that we have further to go this year.
- Interest rates remain very low, with negative rates encompassing more than 20% of the world’s GDP, and Fed Chair Janet Yellen discussing negative rates in the U.S. --the dollar seems to have peaked, at least temporarily
- Global equity markets are more volatile and less of a one-way street
- Sentiment is shifting from historic bear levels; many well-regarded institutional managers are moving into gold and others taking a small hedge position
- The rally is not believed; short interest in major miners and even in the bullion ETFs has risen this year (unlike, say, last year, where the rally was largely short-covering)
- Gold is showing great resilience, with each mini-pullback swiftly reversing
- Though the dollar correction and stock market pullback in mid-January sparked the gold rally, gold continued to move up in February even against a dollar and stock recovery --though stocks are up 50% this year, they are still significantly below their 2011 highs (over 70% on the XAU), while valuations remain very low on an historical basis. Other than most of 2015, the mining stocks remain at multi-decade lows against bullion.
I suspect there will be a pullback in the weeks ahead, but it is likely to be shallower and shorter than “normal” seasonal corrections, certainly than those of the past couple of years. And after this pullback, gold will recover to move higher this year. We have seen the lows in the long gold bear-market (or super-cycle bull correction, which is how I prefer to view it).
What to do?
If you are a long-term investor, disinclined to trade, and you own good quality companies, just hold. However, this would be a good time to lock in some of the recent strong rally. It would do no harm to have some cash on hand to buy in any correction or any new “stories” that come along. We are not selling any specific stock on our list. I would say that most of the gold stocks on our list, particularly the seniors, are a little overbought in the short term and subject to a pullback. What you do depends on your individual situation, not only your overall portfolio and risk tolerance, but also the individual stocks you own.
If you are overweight in gold, start by selling the lower-quality companies, even if they have not moved so much. But if, for example, you have 15% to 20% of your portfolio in a single stock, even a high quality one such as Franco (which remains our #1 gold holding), then by all means trim that position.
Stocks to consider trimming and those not to
As general guidance only, we would now be more inclined to trim at current prices Almaden, Franco (if overweight), Goldcorp, and Yamana (vulnerable to correction with more leverage to continued upside); and less inclined to sell any Osisko, Sunridge, Miranda, Midland, and Almadex. This assessment is based largely on current prices and is no reflection on our ranking of the companies’ quality. Again, we are not selling any gold stocks on our list.
In coming issues, we will briefly review all of the gold companies on our list, starting with the royalty companies.