Gold Rally Crushed For Now & Opportunities

Observations

  • After monitoring the intraday volatility swing (Update: Trump’s Victory & Market Volatility) we saw gold spike up to 1330 yet quickly drop off the next day to continue its down trend.
  • Research points to one of the largest individual gold investors, Stan Druckenmiller, who decided to liquidate his entire gold position during this time. (Fig. 1)
  • Druckenmiller’s gold size is estimated to be around $1 billion, enough to significantly move the sector.
  • We expected the whipsaw in stocks, and for them to continue their rally, although pre-empted by Icahn much earlier than expected (Update: S&P Sell off and rally after Trump).
  • We did not expect the sell off in Gold which could not hold onto its gains just after the election.
  • According to the interview, Druckenmiller’s reasons for owning gold are still valid for this sector:
    • As insurance against extreme risks,
    • As a hedge against inflation, and
    • As a form of money when central banks are losing control.
  • Thus his reason to sell is confusing, however it could be just profit taking as speculated by a few.
  • Nonetheless the reasons for owning gold is still quite valid and now at a more attractive price around 1210.
  • Link to CNBC Squawk Box Interview

With this sell off it is taken as a great opportunity to rebalance or enter into this precious metals sector

Fig. 1 - 2016-11-09 Druckenmiller Sells Gold and Reverses Rally (Source: Interactive Brokers)

Fig. 1 – 2016-11-09 Druckenmiller Sells Gold and Reverses Rally (Source: Interactive Brokers)

 

Gold

  • Trump election should be bullish on Gold because it is heavy on deficit spending. The biggest drivers of the deficit are federal entitlement programs and Trump has no desire to cut these.
  • The Trump administration will rely on the Fed to maintain a loose monetary policy for very few if any interest rate hikes as the national and corporate debt continues to rise.
  • Key: this whipsaw seen with Druckenmiller and the Trump administration is only temporarily bad for gold and good for the dollar.  I believe this will turn around in time.
  • My position in BlackRock World Gold Fund is currently sitting at around -15% post election. Although I have around 25% of total holdings in this sector, the view is fundamentally unchanged.
  • In fact with the current retracement, I am also looking at certain miners and companies for entry.
  • A look at the top holdings of this fund highlights some key players in the sector (Fig. 2)

 

Fig. 2 - BlackRock World Gold Fund Top Holdings (Source: BlackRock)

Fig. 2 – BlackRock World Gold Fund Top Holdings (Source: BlackRock)

 

Precious Metals addition: Silver Wheaton Corp.

  • Currently I have positions in ABX-Barrick Gold, GLD-Goldcorp, HL-Hecla Mining, SSRI-Silver Standard Resources, AG-First Majestic Silver and a few others.
  • The latest addition for my personal portfolio was Silver Wheaton Corp, SLW.
  • SLW is a streaming company (definition) and currently its relatively cheap with a P/E ratio of about 18.
  • This position was entered on 23 Nov 2016. (Fig. 3)

 

Fig. 3 - SLW Price action

Fig. 3 – SLW Price action

 

Conclusion

The precious metals sector along with mining stocks and related companies have now presented attractive prices to be entered into. Temporary volatility and sell off should turn around according to my research.

Best,
Michael

Disclaimer