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2/6/18

Gold stocks are equities too (from IKN455)

As you may have noticed from the preceding three or four posts, I've been having great difficulty in taking this market drop seriously. The reason? Well, there are several but the main one was covered in the intro to The IKN Weekly issue 455, out on Sunday evening and FWIW, it applies even more precisely after watching that 1,000+ point Dow drop yesterday Monday (as well as the whiplash start to Tuesday, 35 minutes ago as I write these words). The reason: I own gold. Read on:




Gold stocks are equities too

There’s a short version to this week’s intro and there’s a long version. The seasoned mining market players among this esteemed audience can skip the long one and go straight to the short one, they say exactly the same thing.


Long Version: When measured by the GLD bullion ETF and done to three significant figures, the price of gold is up 2.216% so far this year. That beats out the 1.42% added by the main precious metals mining ETF, GDX and it knocks the 5.4% loss suffered by its junior sidekick GDXJ into the proverbial cocked hat. In fact GDXJ lost 7.2% this last week alone, it lost 4.04% just on Friday so it’s worth a moment to stop and consider just what you’re buying when you get into mining equities, large or small. And then compare them to gold.


When it comes to the time I present the GLD inventory data here in the weekly (usually in the intro) I tend to tighten the Y-axis parameters as much as possible in order to show changes in GLD bullion holdings visually. The weapon of choice is a chopped-down Y-axis that starts at 750 metric tonnes (mt) and finishes at 900mt but to get the real situation with bullion, it’s better to go standard. Here’s what happens when the chart starts at zero.



You see last week’s big Dow drop there? The record highs they screamed about on your preferred biz TV channel about 100 times last year? The blow-out quarters from the FANGS? The Fed’s various decisions on rates and the ongoing health of the market? The reflection of the rise in house prices? President Trump’s tax returns? Or tax bill? Or immigration executive order? One of any number of high casualty suicide bombings, Euro-located terrorist atrocities or USA mass shooting events? Nope, me neither.


There are very good reasons to own gold, but none of them involve creating portfolio alpha, beating the street or “killing it” (to pretend I’m millennial for a moment). Other people put it other ways, my way is the line “Gold does not make you rich, it stops you from becoming poor”, but that’s just flowery pretentious me, something more prosaic about net worth insurance policy or savings baseline is just as worthy. In my mind, you don’t need to read a single line of any money commentator, newsletter soapbox owner or financial advisor to know that (and you certainly shouldn’t pay them for the knowledge, it’s like paying someone to tell you what time the sun rises every day). On the other hand, what we do round these parts at The IKN Weekly is try to make money in one of the most volatile and unpredictable sectors of capital markets that exists. We speculate (or “invest” if you prefer) in equities that get thrown around on every type of breeze and one of them, the one that gold bullion largely ignored last week, is a correction in the broad market when they come along. Now it may be complacency that has people wringing their hands in my mailbox and telling me that it just isn’t fair (with exclamation marks, I kid you not) that their gold stocks have dropped with the Dow when by all rights (huh? Whose rights? United Nation Human Rights Declaration has a new appendix?) they should benefit from the drop in Wall Mart, Google and Bitcoin. Sorry folks, doesn’t work like that ever. We invest in gold stocks. The word “gold” there may be a noun but it’s a mere predicate telling us about what we’re really talking about, the substantive “stocks”.


Short version: The market corrected at last. The juniors got stuffed. Get over it, Monday’s looking interesting.