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Gold spent most of July range-bound at around the $1,800 per ounce level as opposing forces pulled gold in opposite directions. Gold was held back by a U.S. dollar that has been surging since the 16 June Federal Open Market Committee (FOMC) announcement in which the U.S. Federal Reserve (Fed) indicated it might begin tightening sooner than the market had expected. At the same time, gold found support from falling interest rates, as the ten-year treasury yield declined from 1.47% to 1.22% in July. Gold finished the month at $1,814.19 per ounce, for a $44.08 (2.5%) gain. The NYSE Arca Gold Miners Index1 gained 3.1%, as the larger producers trended higher with the gold price. However, the MVIS Global Junior Gold Miners Index2 declined 1.6%. The smaller companies tend to underperform in weak gold markets. Gold has been in a correction since it reached its all-time high in August 2020 and we expect the junior stocks to struggle until gold shows more positive momentum.
The World Gold Council’s second quarter report showed that overall demand improved in the first half (although not to pre-pandemic levels), mainly due to the resurgence of Covid in India. This was expected but what was a significantly positive surprise was the level of central bank demand. Central bank net purchases totaled 333 tonnes in the first half, which is in line with elevated levels of net purchases seen before the pandemic when Russia and China were the heavy buyers.3 This year, both of those countries have refrained from buying, while Thailand, Hungary and Brazil have stepped in as the largest purchasers. Thailand’s central bank governor indicated that gold addresses the key reserve management objectives of security, return, diversification and tail-risk hedging.4
Falling rates indicates the bond markets fear economic weakness ahead, whereas U.S. dollar strength is indicative of a healthy economy that is attracting investment flows. These diverging markets suggest high levels of uncertainty. The bond markets reflect anxiety over the growing impact of the Delta variant and concerns that the economy might suffer if the Fed begins withdrawing its stimulus. On the other hand, the dollar’s strength suggests rates will climb eventually as the economy improves.
It might be that that the dollar is correctly forecasting the near-term, whereas bonds are taking a longer-term view. Fiscal and monetary stimulus are set to drive the economy for another year or two, regardless of any problems caused by the coronavirus. However, we believe economic growth will face increasing risks once the stimulus begins to wane. The stock and debt markets may face collapse without the government-manufactured liquidity they have come to rely on.
Also, inflation is currently being driven by supply constraints as well as demand from economies emerging from the pandemic. The markets generally believe the Fed’s view that this inflation is transitory. However, we believe that record money supply, structurally higher commodities prices, shifts in labor-related demographics and on-shoring of trade means that inflation may persist in the long-term. A recent Wall Street Journal article focuses on supermarkets that are stockpiling inventory to protect margins from anticipated price increases later in the year. This is classic hoarding behavior used in the seventies to cope with inflation that compounds the problem. Consumers may adopt similar strategies. Inflation presents a significant risk, and if the bond market is correctly forecasting economic weakness, then perhaps the current inflation will eventually transition to stagflation.
Another interpretation of the divergence between the dollar and bond markets is that the traditional economic signals that the market relies on have been distorted by the radical fiscal and monetary policies that began with the global financial crisis and were unleashed on steroids with the pandemic crisis. The world is saturated with liquidity that is available at near-zero rates. Trillions of dollars can drive markets without regard to fundamentals when investors are desperate for returns.
Democratic free markets have provided benefits to society in health, wealth, education and freedom for over 200 years. No other system of government comes close to these accomplishments, in our view. The high levels of uncertainty about the future of the economy, and the often unorthodox or anti-market policies being adopted to cope with that uncertainty, we believe, are putting continued societal benefits at risk. Here are a collection of quotes that articulate our concerns:
We have deep concerns regarding the risks that unconventional fiscal and monetary policies pose to free markets and capitalism. These policies have created excessive debt, ballooning money supply, asset bubbles, inflation, risky investment behavior, and elevated levels of uncertainty. In addition, well intentioned policies and regulations to promote social justice or climate control also risk unintended consequences that might undermine business and society. While we find these witty and concise quotes from economists, writers, and investors who share our view enlightening, investors should take these seriously and consider gold, an asset class with a recognized track record of offsetting pervasive market risk.
All company, sector, and sub-industry weightings as of 31 July 2021, unless otherwise noted.
Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
1NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.
2MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.
3,4World Gold Council, Gold Demand Trends Report, Q2 2021.
NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck Vectors ETF Trust (the “Trust”) in connection with VanEck Vectors Gold Miners ETF (the “Fund”). Neither the Trust nor the Fund is sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding the Trust or the Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance.
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MVIS Global Junior Gold Miners Index (the “Index”) is the exclusive property of MV Index Solutions GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors Junior Gold Miners ETF (the “Fund”) is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.
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