Higher corporate taxes on the horizon and a looming Fed taper have us looking for defensive plays
Valuations and sentiment among gold miners are low, making the case for a short-term play
Investors have given up on this group of stocks as measured by ETF implied allocations
Technically, the NYSE Arca Gold Miners index is near a critical line in the sand
Commodities are on a great run in 2021. Just as sector rotation drives stock prices higher this year, it’s as if the same concept has applied within the hard asset space. Recall lumber futures surging in the second quarter, followed by some industrial metals, and just recently natural gas and even PVC pipe prices have been on the move. Left in the dust are gold and gold miners.
Just last week, gold mining equities took it on the chin to settle at the lowest weekly level since April 2020. The group of misfit shiny metal miners has lost investors money on an absolute and (more significantly) on a relative basis to global stocks in the last year.
50dma Breadth Ticks Up
Speaking of relative performance, something catches our eye. The NYSE Arca Gold Miners Index is at critical relative lows vs the S&P 500 while the 50-day moving average breadth of miners has ticked up. Check out the featured chart below. The divergence is a ray of hope for this beleaguered group.
Featured Chart: Gold Stocks at Relative Support With Improving Breadth
Making 2021 all the more gut-wrenching for gold miners is the price-action in the underlying commodity. Following last year’s nearly 25% advance, it’s been a period of consolidation in the gold market. GLD is off 8% year-to-date while global stocks are up 13%. Gold miners are down a whopping 15%. A culprit for the massive lag in miners versus spot gold is sentiment.
As investors pour money into large cap US stocks, namely the tech sector, fund flows are negative for the mining ETFs. It’s common to see investors pull out from underperforming niches, so we don’t take this as a super-bullish contrarian signal, but it does confirm the sour sentiment.
Low Relative Valuations
Valuations among gold miners are not particularly low on an absolute look, but relative to the S&P 500, they are attractive. We analyze historical views of Price to Book and Price to Cash Earnings ratios to develop valuation Z-scores—miners are about one standard deviation cheaper than US equities compared to the long-term average right now.
Finally, positioning counts. Implied allocations to gold miners are approaching the lowest figures since 2008 (yet another contrarian point). ETF market share is under 0.5%. (For perspective, miners’ peak was a decade ago near 1.5%.) September 2011 was the crescendo for precious metal equities as global stocks plunged during the US credit downgrade and Eurozone crisis. For a time, gold was seen as a defensive play. At least just for the near-term, we think it could be again.
Bottom Line: We detail the likelihood of higher corporate taxes in our Weekly Macro Themes report. In addition to potential fiscal headwinds, monetary policy may turn bearish as the taper looms. While we are bearish gold in the medium-term, there could be short-term upside in gold miners.
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