The precious metals gold, silver and platinum gained 16.35%, 11.55%, and 9.64% respectively during the first quarter. 2016 marked the strongest quarterly appreciation on record for gold since 1974. Between January and March, gold exchange traded funds (ETF) increased their assets by 11 Billion US dollars, purchasing 300 metric tons of gold, an amount equivalent to 11% of the world’s annual mined supply. This sudden and abrupt change in gold investment demand caught the world’s largest investment manager BlackRock by surprise. The company had to temporarily suspended sales of its iShares Gold Trust ETF due to regulatory issues after assets surged by 20% in the first two months of year.
Precious metal mining equities, the biggest winners of 2016, outperformed the precious metals by far. Over the first quarter, the iShares Global Gold Miners ETF gained 56%, the Sprott Junior Gold Miners ETF gained 49%, and the Market Vectors Gold Miners ETF (GDX) gained 45%. The upward trend continues in April with the XAU index extending its year to date gains to 75%, the GDXJ to 70%, and the GDX to 65%. Part of the move is certainly fueled by short covering but such a sharp turnaround on heavy volume may herald the start of a long awaited end to the 5year bear market in precious metals and precious metal miners. Mining equities have significantly underperformed the physical metal and the stock market for years. Some precious metal mining equities have dropped by as much as 80% since 2011. Buying gold equities as a proxy for the metal was a crowded and disastrous investment strategy. Perhaps it is all about to change in 2016. Despite the year’s impressive turnaround, most miners still trade near their record lows, offering deep value investors willing to stomach high volatility a cheap leveraged investment on precious metals. Gold mining stocks tend to lead the price of gold in both directions. Mining equities usually rise earlier and faster than the metal in bull cycles and fall sooner and much more during downturns.
Apart from the outsized precious metal market move three other related bullish events occurred for the sector during the quarter. In January, the Yen appreciated and Japanese stocks dropped, that is they moved in the unintended direction, after the Bank of Japan issued a surprise announcement adopting a negative interest rate policy. Then, in February the European Central Bank delivered a larger than expected monetary easing program only to see the Euro strengthen after its announcement, the currency was expected to move lower. Finally in March, the US Federal Reserve was forced to abandon its stated ambition of normalizing policy rates with 4 interest rates hikes in 2016 due to the strengthening dollar. For the first time in 7 years central bank interventions did not move markets in their intended manner. 7 years of ultra low accommodative global central bank policy, multiple rounds of quantitative easing, 7 trillion dollars worth of bonds artificially trading at negative interest rates, and an ever growing mountain of debt have produced very little global economic growth but a great deal of collateral damage. The inevitable next bull market in precious metals and precious metal mining equities will coincide with a loss of faith in central banking omnipotence and those concerns began to emerge in 2016.
By Eric Schreiber, DuraWealth AG