Since gold peaked around $1900 per ounce in 2011, gold stocks have endured a challenging three years. In 2014, things started promisingly enough as gold stocks began to stage a recovery in the first half of the year. This was before weakness in global currencies, versus the U.S. dollar, and expectations of a Fed rate hike combined to reverse the momentum. And then, towards the end of last year, sentiment tumbled to all-time lows creating a unique opportunity for contrarian investors.
However, while gold declined slightly in USD terms during 2014, it
actually posted respectable gains in most foreign currencies.
Gold has historically had an inverse relationship with the US dollar.
Because gold is priced in USD, as the greenback strengthens the gold
price typically weakens. However, in the first two months of 2015 this
hasn’t been the case. Why? Well, a number of factors have driven renewed
investor interest in both gold and gold equities. This includes
stubbornly low inflation, fears of outright deflation in Europe and
Japan, the ongoing conflict in the Ukraine and continued uncertainty
surrounding Greece’s future as an EU member nation.
In a bid to stimulate growth, several central banks have enacted
negative interest rate policies leading to approximately $2 trillion of
government debt globally that has a negative yield. This diminishes the
opportunity cost of holding gold at a zero yield.
Increasingly, investors are also growing concerned about the unforeseen
consequences of central bank policies. Most recently, the markets were
rattled when the Swiss Central Bank abandoned its commitment to peg its
currency to the Euro. As a result, investors have begun to return to the
sector. For the first time in several years, inflows to gold ETFs have
turned positive and gold equities have been strong performers
So, why should investors consider gold stocks? The primary reason is
portfolio diversification. Historically, the correlation between gold
stocks and traditional stocks is very low. With the S&P 500 and Dow
Jones indexes at all-time highs, it could be a good time to consider an
asset class that typically does well during stock market corrections.
-- Mitch Zacks, Market Insights, Zacks Investment Management