Gold Stocks: Performance Analysis and Buying Strategy - Week 3 February 2024

Introduction

Gold is a highly sought-after commodity that has been used for centuries as a store of value and a hedge against inflation. The gold market is complex and can be influenced by a variety of factors, including economic data releases, central bank buying, and geopolitical tensions. In this article, we will discuss the current state of the gold market, the impact of economic data releases on gold prices, and the performance of gold stocks.

Economic Data Releases and Gold Prices

The CPI and PPI reflect inflation and drive investor expectations around monetary policy and interest rates. Retail sales data also plays a crucial role in assessing the economy's health and signaling potential economic directions. The Federal Reserve's policy decisions, particularly the details from the January meeting minutes, are intensely focused on by investors, and the Fed's stance on interest rates is a vital determinant of gold's valuation. The short-term outlook for gold is somewhat bullish, with key upcoming economic reports and Fed statements, particularly regarding inflation and interest rate policies, being crucial for investors to monitor.

Chinese Gold Demand and the Global Gold Market

China ranks as the world's top gold consumer, and Chinese demand has a significant impact on the global gold market. Gold withdrawals from the Shanghai Gold Exchange (SGE) hit 271 tons in January, the highest level on record, and withdraws from the SGE represent wholesale gold demand in China. January is typically a strong month for gold demand in China with retailers restocking ahead of the Chinese New Year. Gold also got a boost from the sale of "Year of the Dragon" themed jewelry, which is often considered auspicious and has helped support broader Chinese jewelry sales. Gold's performance in the Chinese currency lagged behind global stocks, but it outperformed Chinese equities and commodities. This should remind local investors of the benefit of diversifying their portfolios with gold, which has low correlations with Chinese assets. Gold charted a 17 percent increase in yuan terms in 2023 and ranked as the second best-performing asset class in China. Strong gold demand drove the price premium higher in China last month, and assets under management by Chinese-based gold ETFs rose by $113 million to $4 billion in January. Inflows of gold into China-based funds totaled 1.6 tons in January, bringing the total to 63 tons. Safe-haven demand drove investors into gold as Chinese equities sagged for the seventh straight month and the yuan weakened. Gold ETFs are funds traded on the market like stocks that are backed by physical gold held by the issuer, and they can make up part of a good investment strategy, but they aren't a substitute for owning physical gold either in your personal possession or held in a trusted, secure storage facility.

Gold Stocks: Performance Analysis and Buying Strategy

Royal Gold Inc. (NASDAQ:RGLD) is a compelling buy due to its superb valuation, positive sentiment, and the fact that billionaire investor Stanley Druckenmiller is buying gold miners. The stock has retreated back to a point where it is now in the zone for a forward 1-year basis, and the Sprott Physical Gold and Silver Trust (CEF) is trading at a high discount relative to NAV. Druckenmiller has begun buying, though the bets appear to be modest at this point. He has placed new, albeit smaller, bets in the mining sector, and his view on macro and sectors is what the author is trying to discern. The US Dollar and gold's relative expensiveness are the only cautionary tones, but the author would not back up the truck and would just buy a little like Druckenmiller.

The impact of economic data releases on the gold market is significant, with the CPI and PPI reflecting inflation and driving investor expectations around monetary policy and interest rates. Retail sales data also plays a crucial role in assessing the economy's health and signaling potential economic directions. The Federal Reserve's policy decisions, particularly the details from the January meeting minutes, are intensely focused on by investors, and the Fed's stance on interest rates is a vital determinant of gold's valuation. The short-term outlook for gold is somewhat bullish, with key upcoming economic reports and Fed statements, particularly regarding inflation and interest rate policies, being crucial for investors to monitor. Technical analysis is also important in determining the future direction of gold prices.

Chinese gold demand kicked off 2024 with a bang, with wholesale gold demand setting a record in January and assets under management by Chinese gold ETFs reaching an all-time high. China ranks as the world's top gold consumer, and Chinese demand has a significant impact on the global gold market. Gold withdrawals from the Shanghai Gold Exchange (SGE) hit 271 tons in January, the highest level on record, and withdraws from the SGE represent wholesale gold demand in China. January is typically a strong month for gold demand in China with retailers restocking ahead of the Chinese New Year. Gold also got a boost from the sale of "Year of the Dragon" themed jewelry, which is often considered auspicious and has helped support broader Chinese jewelry sales. Gold's performance in the Chinese currency lagged behind global stocks, but it outperformed Chinese equities and commodities. This should remind local investors of the benefit of diversifying their portfolios with gold, which has low correlations with Chinese assets. Gold charted a 17 percent increase in yuan terms in 2023 and ranked as the second best-performing asset class in China. Strong gold demand drove the price premium higher in China last month, and assets under management by Chinese-based gold ETFs rose by $113 million to $4 billion in January. Inflows of gold into China-based funds totaled 1.6 tons in January, bringing the total to 63 tons. Safe-haven demand drove investors into gold as Chinese equities sagged for the seventh straight month and the yuan weakened. Gold ETFs are funds traded on the market like stocks that are backed by physical gold held by the issuer, and they can make up part of a good investment strategy, but they aren't a substitute for owning physical gold either in your personal possession or held in a trusted, secure storage facility.

Conclusion

In conclusion, the gold market is a complex and dynamic environment that is influenced by a variety of factors, including economic data releases, central bank buying, and geopolitical tensions. The short-term outlook for gold is somewhat bullish, with key upcoming economic reports and Fed statements, particularly regarding inflation and interest rate policies, being crucial for investors to monitor. Chinese gold demand kicked off 2024 with a bang, with wholesale gold demand setting a record in January and assets under management by Chinese gold ETFs reaching an all-time high. Gold ETFs are funds traded on the market like stocks that are backed by physical gold held by the issuer, and they can make up part of a good investment strategy, but they aren't a substitute for owning physical gold either in your personal possession or held in a trusted, secure storage facility. Royal Gold Inc. (NASDAQ:RGLD) is a compelling buy due to its superb valuation, positive sentiment, and the fact that billionaire investor Stanley Druckenmiller is buying gold miners. The stock has retreated back to a point where it is now in the zone for a forward 1-year basis, and the Sprott Physical Gold and Silver Trust (CEF) is trading at a high discount relative to NAV. Druckenmiller has begun buying, though the bets appear to be modest at this point. He has placed new, albeit smaller, bets in the mining sector, and his view on macro and sectors is what the author is trying to discern. The US Dollar and gold's relative expensiveness are the only cautionary tones, but the author would not back up the truck and would just buy a little like Druckenmiller.