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Why are Gold Stocks Outperforming?

Commodities / Gold and Silver Stocks 2016 Jan 07, 2016 - 12:53 PM GMT

By: Ned_W_Schmidt

Commodities

Even a cursory review of U.S. stock market indices over the past year shows sharp differences in the character of the first half of last year and the latter half. A clear discontinuity occurred in the path of that market. That a Part A and a Part B existed cannot be ignored. The fantasies and dreams of Part A were dashed in Part B. For whatever the reason, the character of markets changed.

Table that follows shows end of July 2015 values for a number of market indices and investments, the recent value for the same, and the percentage change for that period. One question comes to mind after reviewing this table. Why are the Gold stocks outperforming?


Before trying to answer that question, let us make some other observations on the table. Both GLD and a bushel of U.S. corn, while experiencing slightly negative returns, have also performed better than U.S. stock market. Certainly a bushel of corn was better than owning AAPL(s), # 14 in the table. Few in the investment world had expected such results. As the trends identified in the table occurred over more than five months, they largely reflect more than events of the past week.

INVESTMENT SCORECARD
Selected Prices and Indices
Percent Change from 31 July 2015 - 6 Jan 2016

Rank Index 31 Jul 2015 Current % Change
1 GDXJ 19.34 20.18 4.3%
2 GDX 13.75 14.25 3.6%
3 $DXY(Dollar) 97.33 99.20 1.9%
4 GLD 104.93 104.67 -0.2%
5 US Cash Corn 3.66 3.62 -1.1%
6 NASDAQ 100 4589 4444 -3.2%
7 DJIA 17690 16907 -4.4%
8 SLV 14.08 13.36 -5.1%
9 S&P 500 2104 1990 -5.4%
10 SSEI(China) 3664 3362 -8.2%
11 FTSE 100 6696 6051 -9.6%
12 Agri-Food Price Index 234.63 209.38 -10.8%
13 Agri-Equities Tier One 253.56 218.77 -13.7%
14 AAPL 121.3 100.70 -17.0%
15 US Oil 46.82 33.98 -27.4%

Two possible answers to our question of the day on the excellent performance of the Gold stocks seem most worthy of discussion. First of those relates to the "January effect". That phenomenon begins to develop late in the year after tax loss sales and selling driven by portfolios managers trying to fool their clients by "window dressing" their portfolios are complete.

This selling is focused in those stocks that have not done well. Certainly the Gold stocks would be included in that group for they have had a rough couple of years. When that selling pressure dissipates and investors begin in January to purchase beaten down issues for a bounce, the subject stocks tend to rise. Some of this effect has likely played some role in improved performance of the Gold stocks.

Second possible answer to our question is one that should be given serious consideration. The stock market is a discounting mechanism. Prices in the stock market, despite periods of emotion driven mispricing of some issues, reflects the investment views of a vast number of investors. The market, sending its message through the Gold stocks, seems to be telling us that end of the bear market for Gold and Silver has either passed or is about to pass. Gold stocks rising should be a prediction of and a precursor to the price of Gold rising.

The stock market is often wiser than most. As evidence, it has been far wiser than nearly all Street analysts on AAPL, as evident by the possibility the company is cutting production of iPhones. In the past few months the market. through the Gold stocks, has changed the message on Gold and Silver. Time to listen to the market's message?

By Ned W Schmidt CFA, CEBS

Ned W. Schmidt,CFA has had for decades a mission to save investors from the regular financial crises created by economists and politicians. He is publisher of The Value View Gold Report, monthly, with companion Trading Thoughts. To receive these reports, go to: www.valueviewgoldreport.com Follow us @vvgoldreport

Copyright © 2016 Ned W. Schmidt - All Rights Reserved

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