As I’ve explained before, our firm uses quantamentals in our gold investing process, combining old-fashioned, bottom-up stock picking with big data and machine learning. This allows us to screen for the best possible producers with the most attractive balance sheets. We prefer miners that have a proven track record of sustainable profitability even when precious metal prices are down.
It’s these quantamentals that went into the creation of our newest quant ETF, our first to launch in Canada.
On Friday, I was thrilled to be back in my hometown of Toronto, where Galileo team members and I had the privilege of opening the Toronto Stock Exchange. The TSX, as you may know, has a long history of being the world’s premiere marketplace for mining stocks, and in 2016, 57 percent of the world’s financing for mining companies was done on the TSX. It’s only fitting, then, that our new ETF is traded there.
I urge you to listen to the ETF Trends webcast in which Tom Lydon and I discuss the gold market today and the factors we use in picking the strongest gold stocks.
Early last week, North Korea said it was interpreting some of President Donald Trump’s comments as a declaration of war, insisting it can freely shoot down American military planes even if they’re not flying in North Korean airspace. As everyone is pointing out, the country has made similar threats in the past, but with Trump as president, there could be an added level of unpredictability.
Ordinarily, we would expect geopolitical risk of this scale to boost the price of gold on increased safe haven demand. Instead, the yellow metal struggled last week to extend the gains it’s made in 2017 so far.
The main contributor to the pullback is likely the fact that markets in China will be closed this week in observance of Golden Week. Think of Golden Week as China’s Fourth of July—if the Fourth of July lasted for several days. This year marks the 68th anniversary of the founding of the People’s Republic of China.
Given that the country is the world’s largest gold market, the metal has in the past depreciated leading up to the week-long celebration. If you remember from last year, gold was knocked down significantly after someone dumped as much as $2.25 billion of the metal in the futures market, and on October 2, gold suffered its biggest one-day loss in three years. Last week it fell 1.33 percent.
As you can see above, gold immediately rallied following the correction in 2014 and 2015, but it continued to drop in 2013 and 2016.
There’s no telling what it might do this year, of course, but I believe this could be a good buying opportunity, as the fourth-quarter Indian wedding season has historically brought with it higher gold prices on stronger demand. The backdrop looks favorable for all metals, in fact, as we head into the final quarter of the year, with improving global economic and manufacturing activity suggesting demand could surge.
Granted, other factors besides Golden Week are putting pressure on gold right now. The US dollar just had one of its best months of the year, and the real five-year Treasury yield turned positive. Keep your eyes on yields, though, because as soon as they turn negative again, gold could take off.
Then there’s the record-setting stock market, which might discourage some investors from seeking a safe haven. But I think it’s worth pointing out that gold has remarkably held its own during this bull run, closely keeping track with the S&P 500 Index in 2017. As of last Friday, the S&P 500 was up 11.6 percent year-to-date, gold 11.5 percent.
Small-cap stocks, as measured by the Russell 2000 Index, were among the biggest winners immediately following the November election, the idea being that Trump’s “America first” policies would benefit smaller, domestic companies with less exposure to foreign markets the most.
This trade was put on hold somewhat as Trump’s pro-growth agenda repeatedly stalled in Congress. But renewed talks of tax reform last week excited investors, helping to push the Russell 2000 back into record-closing territory. For the 12-month period, the index of American small-cap stocks is beating the S&P 500 by nearly 3 percent.
The bottom line is that Congressional Republicans—and Trump—need this win after the multiple failed attempts to repeal and replace Obamacare. Tax reform should be much easier to achieve, as there seems to be greater consensus on what needs to be done.
Indeed, the tax code has not been fundamentally changed in more than 30 years. If Trump gets his way, the number of personal income tax brackets will fall from seven to three, with the top marginal rate lowered from 39.6 percent to 35 percent.
The corporate tax rate, meanwhile, would be set at a more reasonable 20 percent, down from 35 percent—currently the highest rate in the world among developed economies. This should help U.S.-based firms become much more competitive, and ideally it would encourage multinationals to bring home the estimated $3.6 trillion in cash held overseas.
As I told Fox Business’ Liz Claman on her show recently, I’m very bullish right now, with global GDPs and the purchasing manager’s index (PMI) headed higher. U.S. tax reform should only encourage further growth, both here and abroad. – Frank Holmes
This week’s Chart of the Week features the US Dollar Index as it has risen off its recent low at 91.01. After collapsing from recent highs near 104, DXY appears to have broken above its downtrend line. However, in this case it appears that this break out is a “head fake” and DXY is ready to make another major move lower to 88-89. Once DXY breaks below 92.90, we are looking for a move down to 92.07 which was a recent level of support as indicated in the chart above. We then see 92.07 being broken and a test of the recent low at 91.01 as the final check point before our 88-89 target. The other tool we are using this week is a price oscillator (PO) which is suggesting that this bounce is a “head fake.” We recently saw the PO cross above 0 and this is something that we saw multiple times this year. However, every time that the PO crossed above 0 this year (six times), DXY reversed after experiencing a bounce. The same setup appears to be the case for the most recent bounce in DXY and the index is preparing for its next major move lower which should begin this week. The PO should be heading back to its lows near -0.8 before a bottoming of DXY.
What this means for metals is great news and gold and silver should be heading much higher very soon. – Alexandros Yfantis
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