On June 25, the stock markets appeared to be weak once more due to the United States virus-related concerns and rising jobless claims. But, gold GCQ20, -0.03% has become one of the best-performing asset classes of 2020 beating the S&P 500 by quite far. Recently, the precious metal flirted with an 8-year high recording which made most analysts offer their bullish predictions.
Crescat Capital’s global macro analyst Otavio ‘Tavi’ Costa is one such expert who provided their outlook on the precious metal markets. According to him, we are currently in the early stages of a major bull market for gold as a non-correlated macro asset class. That is greatly good news for one of the unpopular group of stocks.
Costa said:
“Wait until the Robinhood traders learn about the gold and silver penny stocks, that’s where we’re long.”
He was referring to a low-cost trading app that has so far lured a large number of investors who have recently won several bets on beaten-down stocks. Costa explained:
“The mining space has been in sort of a recession since the 2011 peak of gold and silver prices. The capital in the space has dried up significantly. I think that now with the macro and fundamentals aligning with technicals on the long-term side, I’ve never seen such a good setup for an industry like precious metals.”
Gold Mining Sector
Also, the fund manager said that they have been taking some friendly activity stakes in various ‘junior explorers’ miners who have prolific projects. Crescat developed a fund that is entirely devoted to mining companies in 2019 since the industry was quite beaten-down.
These miners are divided into senior miners GDX, +0.63% who mostly have big developed mining operations, and juniors GDXJ, +0.79% that focus most of their resources on hunts for precious metal deposits. He explained that the large-cap mining space began to improve slightly. Costa is now convinced that investors will move from there onto the bottom part of this industry.
General Market Cap
The general market capitalization of the precious metals sector represents below 1% of the entire market cap of the equity market in general. Thus, it is perfectly positioned to benefit from various factors including; historically high U.S. equity valuations, suppressed long-term rates, a virus-driven depressed economic picture; and fiat money printing globally.
Costa added:
“The metals prices should be rising significantly and capital will start to pour into the industry in general, and I think that’s going to be a big change in terms of margins and fundamentals of those businesses.”
According to the latest data, the mining industry is trading at five to ten times free cash flow. That is a measure of the company’s operating expenses and capital spending. In general, the tech-sector industry trades at 20 to 70 times sales. Costa concluded:
“There are no fundamental reasons in which we’re going to see organic growth in the economy; and that brings you back to the situation of the government. It’s already broke and deficits will only increase going forward…it will force the Fed to continue stimulus going forward. That creates and an environment for gold and all those miners.”
The Market
The Dow Jones International, S&P 500, and Nasdaq futures have all come under intensive pressure recently. Also, the European stocks (SXXP) are down as a second wave of the pandemic threatens to put the world under another lockdown. A 2% drop for South Korea’s Kospi pushed the Asian market lower on June 25.
The ‘Noise’
The US weekly jobless claims amounted to 1.48 million which was a decline but somewhat higher than what the market experts predicted. The continuing jobless claims dropped below 20 million for the first time since mid-April. That shows the labor market is gradually healing.
The durable-goods orders on the other hand surged by almost16% in May. Moody’s study suggested that state and local governments will require billions more to avoid the possibility of 4 million layoffs.
Disney DIS, -0.63% announced that it will delay the reopening of Disneyland; and several other California theme parks until after July 17.
Wirecard WDI, -73.99%, a German payments system provider has filed for bankruptcy; after it failed to get €1.9 billion ($2.1 billion). This occurrence is also blamed on the arrest of the company’s chief executive on suspected market manipulation.
On its part, Sweden paid a heavy health price since it never initiated a strict COVID-19 lockdown. The country’s economy now seems to be failing due to the pandemic. A Japanese study suggested that wearing masks while in public places reduces the chances of contracting the virus extensively. Hence, many authorities and governments around the world urge their citizens to wear masks to cut down the rising virus-related death rates.
As it stands, it appears like the second wave of this pandemic is starting to develop. Investors are worried that it might crumble the global economies further and gold is feeding on these worries to climb higher.
