Gold stocks have proved their mettle this year. The novel coronavirus has run roughshod through the global economy, driving asset price volatility to historic levels. Now that we’re on the back end of the fastest bear market in history, we have enough data to draw a few conclusions about the behavior of precious metals and the ecosystem of assets that surround them. This is just the backdrop needed to prove just how valuable owning gold stocks in your portfolio can be.
These days, investors have a wide variety of companies in the industry to choose from. Here are some of the most popular:
- Newmont Corporation (NYSE:NEM)
- Barrick Gold (NYSE:GOLD)
- Franco-Nevada Corp (NYSE:FNV)
- Wheaton Precious Metals (NYSE:WPM)
- Agnico Eagle Mines (NYSE:AEM)
With that in mind, let’s look at the three compelling reasons to include gold stocks among your holdings.
Reasons to Buy Gold Stocks: Inflation Hedge
Nothing whips gold bugs into a frenzy quite like the government spinning up the printing press to combat an economic depression. Together, the Federal Reserve and Congress have thrown some $6 trillion at the crisis. The ramifications of injecting such eye-popping piles of cash into the economy are tricky to predict, but many would argue inflation is one of the most obvious outcomes.
Investors worried about this eventuality could be well-served in upping their exposure to gold and gold stocks. But even if we don’t have runaway inflation in the future, there are other reasons why these could be wise purchases.
Most warm-blooded humans can’t handle an all-stock portfolio. It’s too volatile, too taxing on the emotions. For proof, join me for a stroll down memory lane to two months ago. We just suffered the quickest crash in history, with some 30% of portfolio values stripped away over the course of four-and-a-half weeks. It was even worse if you were heavily weighted in small-caps. From peak-to-trough, the Russell 2000 lost 43%.
While it’s true that gold stocks were trounced alongside the rest of the market, they’ve rapidly recovered and, more importantly, their behavior has decoupled from that of the entire market. The 10-day correlation of the Gold Miners ETF (NYSEARCA:GDX) and the S&P 500 currently sits close to zero, which is to say they’ve been essentially uncorrelated. Over the past year, the correlation reading has spent as much time below zero as above, which, again, is evidence that there really hasn’t been a strong link to both assets.
For those seeking diversification, this is exactly what you want to see.
The final argument for buying gold stocks has to do with their recent performance. Whereas the first two focused on fundamental, long-term reasons for warming to equities tied to the yellow metal, the final rationale is one based on technical analysis. GDX and crew have proven themselves as market-leaders in the post-Covid 19 market. Last week’s run carried GDX to fresh seven-year highs. Along the way, the fund finally blasted through a multi-year resistance zone. Its year-to-date gain is now approaching 20%. The S&P 500, meanwhile, is down 14%.
This is a perfect example of relative strength, otherwise known as outperformance. There’s an entire subset of the trading population that focuses on trading momentum. They look for leading areas to buy and essentially add fuel to an already hot fire. This can lead to a virtuous cycle where the momentum feeds on itself. The muscle-flexing is one of the price-based dynamics that is buttressing the bullish argument for buying gold stocks right now.
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