3 Gold Stocks That Will Call Janet Yellen’s Bluff

Gold stocks - 3 Gold Stocks That Will Call Janet Yellen’s Bluff

Source: Bullion Vault via Flickr (Modified)

There’s an old saying that goes “buy the rumor, sell the news.” For investors of gold stocks, however, the statement should read, “ignore the news.” Gold prices have been slipping off speculation that the U.S. Federal Reserve will hike interest rates sooner rather than later. Fed Chair Janet Yellen indicated during a meeting in Jackson Hole, Wyoming, last Friday that she was encouraged by strong economic data. However, this is merely empty rhetoric.

Unemployment, Janet Yellen
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Source: Source: JYE Financial, unless otherwise indicated

Certainly, national unemployment dropping below 5% played a critical role in Janet Yellen disclosing her assessment. The U.S. economy looking the most stable among developed nations also supports the case of a rate hike. Regardless of these factors, it’s difficult to imagine 10-year Treasury rates getting any lower. And that, under normal circumstances, would be bearish for gold and gold stocks.

Here’s the problem: Janet Yellen is relying on arbitrary data. When looking at unemployment data during the post-World War II era, American workers face an unprecedented cycle of pessimism. During a 20-year period starting from 1950, unemployment averaged less than 4.7%. During the 1970’s and 1980’s — which featured abnormally arduous economic challenges — the jobless rate jumped to 6.8%. But in this decade, unemployment is averaging nearly 7.6%. No wonder gold stocks are reacting to the fear trade!

Janet Yellen has a friend in Hillary Clinton, who often mocks rival Donald Trump’s campaign slogan, “Make America Great Again.” However, “The Donald” has a legitimate point. While long-term joblessness has been rising, growth in gross domestic product has been sliding. In fact, unemployment and GDP growth rates share a strong, negative correlation of 60%.

It all boils down to this: Americans are finding less substantive work. As a direct result, economic growth is severely impacted. This bolsters the derisive argument that much of the jobs recovery is coming from Wal-Mart Stores, Inc. (NYSE:WMT) or McDonald’s Corporation (NYSE:MCD). That in turn should drive money to gold bullion and gold stocks, which are traditional safe havens against uncertainty.

Janet Yellen overplayed her cards. Here are three gold stocks that will take advantage.

Gold Stocks to Buy: SPDR Gold Trust (ETF) (GLD)

GLD, gold stocks
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Source: Source: JYE Financial, unless otherwise indicated

Gold prices have been among the biggest surprises this year, and the popular exchange-traded fund SPDR Gold Trust (ETF) (NYSEARCA:GLD) is making the most of it.

Year-to-date, the GLD is up over 23% — more than three-times the performance of the benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Critics, though, have been quick to point out that the GLD is down 3% for August. Are gold stocks losing their luster?

In a word, no. Gold and GLD reacts to uncertainty, and there’s plenty of that to go around. Janet Yellen may talk a big game about low unemployment, but this ignores a major caveat. Between 1950 and 2015, there have been 20 years where joblessness was below 5%. During these fortuitous years, GDP growth averaged 4%. But in this decade, GDP growth is averaging around 2%. That means more Americans are working, but the economy is slower than it has ever been!

How does that make sense? Again, it’s the Wal-Mart jobs conundrum. More people working substandard jobs dilute the labor market. That’s wonderful for government statistics and political pundits, but the reality is much less rosy. It also contradicts bullishness from Janet Yellen, and by proxy, raises the attractiveness of gold stocks and GLD.

Investment experts always advise to keep things simple. With long-term economic growth sputtering as it is, GLD just makes sense.

Gold Stocks to Buy: Royal Gold, Inc (USA) (RGLD)

RGLD, gold stocks
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Source: Source: JYE Financial, unless otherwise indicated

Nothing shines brighter than gold stocks when the precious metals complex moves higher. Case in point is Royal Gold, Inc (USA) (NASDAQ:RGLD). RGLD stock is up nearly 100% YTD, making it one of the best performing investments of 2016.

The jump in gold and silver prices couldn’t have come at a better time. For fiscal year 2015, RGLD missed all of its quarterly earnings targets. The margin of underperformance was also fairly wide, averaging 11% below consensus. Although there are still challenges ahead, RGLD has shown some improvement in its financials. In addition, a reworked arrangement with one of its biggest, but financially troubled, mining projects potentially provides many years of low-cost gold production.

Admittedly, the double-digit losses for RGLD in the month of August will put off a lot of investors. However, after bouncing strongly from mid-January’s spike bottom, a correction is normal and to be expected. We also saw a similar drop off in May, when RGLD lost 9% of market value. The upward trend line is still intact, so overreacting may not be too helpful here.

Like most gold stocks, RGLD has suffered through multiple rough patches. But with gold prices rising again, the miners have become a compelling opportunity.

Gold Stocks to Buy: Randgold Resources Ltd. (ADR) (GOLD)

GOLD, gold stocks
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Source: Source: JYE Financial, unless otherwise indicated

Among gold stocks, Randgold Resources Ltd. (ADR) (NASDAQ:GOLD) has been reacting harshly to Janet Yellen. Over the trailing 30-day period, GOLD shed nearly 20% of market value. Since Yellen’s hawkish comments, GOLD dropped 5%. In comparison, RGLD lost 3%.

The other elephant in the room is Randgold’s 52% YTD performance, which is half that of many of its competitors. So, when should investors consider GOLD stock?

It’s all about the give and take. Unlike lesser gold stocks, Randgold is fundamentally sound. Its double-digit operating and net margins are one of the best in the industry. In contrast, at least half of the precious metal mining industry is underwater on profitability. The balance sheet is also very strong, with GOLD unfettered by long-term debt. The tradeoff is that revenue growth is comparatively slow, thus making shares more pricey against earnings.

Against its peak share price of this year, GOLD stock is down nearly 25%. Assuming that the precious metals market continues its run, that is a fairly generous discount. Also, GOLD hasn’t broken below its horizontal support line. After a volatile two-month period, it’s reasonable to expect the bulls to stage a recovery rally.

GOLD won’t give you the crazy returns that are typical of speculative mining companies. At the same time, it provides a stability that’s just not common in this sector.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/08/3-gold-stocks-call-janet-yellens-bluff/.

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