Gold stocks have been absolutely hammered in recent months, especially the smaller outfits contained in the Vectors Junior Gold Miners (NYSEARCA:GDXJ), including IAMGOLD Corp (NYSE:IAG) and Alamos Gold Inc (US) (NYSE:AGI). From its August high, the GDXJ fell by nearly one-half to the low set in December.
But could a turnaround be afoot?
A combination of factors conspired against precious metals over the past six months. The Federal Reserve sounded an increasingly hawkish note, ditching the mid-year dovishness related to the Brexit vote fallout to prepare markets for a December rate hike. Economic and earnings growth bounced back.
President-elect Donald Trump’s rise in the polls and surprise victory in November accelerated the weakness as inflation expectations surged as economists penciled in the impacts of his proposed fiscal stimulus plans including infrastructure spending and tax cuts. Things were made worse by the Fed’s three-quarter-point rate hike forecast for 2017.
What’s changing now?
For one, people are realizing Trump’s plans could, in fact, be more disinflationary than widely realized. Gluskin Sheff’s David Rosenberg doesn’t believe so, and gives a list of reasons why, including:
- Deregulation and lower corporate taxes will reduce business costs, protecting profit margins even if wages rise.
- Infrastructure spending, if done right, should boost currently stagnant labor productivity and thus reduce unit labor costs.
- Trump’s win has boosted long-term interest rates — on higher inflation and GDP growth projections — which is weighing on real-estate prices.
- The U.S. dollar’s recent surge will reduce commodity and import prices.
- Bank credit creation and money velocity is slowing — both antecedents of inflation — suggesting higher interest rates are slowing the money markets.
Moreover, there is volatility overseas in Chinese currency and interbank lending markets that has resulted in a safe-haven bid in precious metals. This, combined with evidence of a reversal of post-election trading themes amid profit-taking and short covering, suggests gold stocks should continue their rise after breaking out of their multi-month downtrend resistance line on Thursday.
As a result, I have recommended the GDXJ to Edge subscribers.
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