Gold and silver have been on a tear this week, with the yellow metal hitting a nine-year high of $ 1,897 in intraday trading on Thursday. Silver was trading above $ 22.70, up 94% from its 52-week low on March 18.
Click to enlarge
As I told Kitco News in February, we are in a centuries-old bull market, supported by several factors, and there is no reason why gold cannot reach $ 10,000 in the years to come. Do you remember rhodium? The rare earth metal has climbed 22 times, from $ 625 in July 2016 to $ 13,850 in March.
Precious metals miners have also outperformed, with the Philadelphia Gold and Silver Index so far beating the S&P 500 of the year by a factor of 17. Among the top performers since the start of the year are Gold Fields (in increase of 88.4%), Harmony Gold Mining (85.7%) and Alamos Gold (84.1%).
Our favorite way of playing the rally remains the precious metals royalty and streaming companies, notably the leaders Franco-Nevada (up 54.4% year-on-year), Wheaton Precious Metals (76.3%) and Royal Gold (13.5%). The group has reported a strong first quarter thanks to rising metals prices, and I look forward to second quarter results when they start reporting early next month.
Over the past two years, Franco-Nevada, Wheaton Precious, and Royal Gold have seen their combined market capitalization more than double in value, from $ 29.5 billion to some $ 61.5 billion.
Click to enlarge
Current Gold Drivers
Some investors may wonder if the rally in gold is sustainable. We believe this is the case, especially in the short term.
Much of the gold price action is driven by the current realization that the coronavirus does not go away so easily without a vaccine. During his televised briefing on Tuesday, President Donald Trump said the situation “is unfortunately likely to get worse before it gets better”, highlighting fears that lockdowns and layoffs will continue into the fall and in the winter.
LinkedIn became the last company to announce a downsizing this year. The Microsoft-owned tech company will be shedding around 960 jobs across the world as the pandemic has reduced demand for its recruiting products. This includes Talent Solutions, which “continues to be impacted as fewer companies, including ours, have to hire at the same volume than before,” wrote LinkedIn CEO Ryan Roslansky in a blog post.
Gold also caught a bid this week thanks to the European Union (EU’s) unprecedented $ 2.1 trillion stimulus package, announced Tuesday morning after four days of negotiations. The deal features a number of firsts: European countries will raise money by selling government bonds collectively rather than individually, and much of the aid will be given to member states not in the form of loans but in cash. form of grants, which do not need to be repaid.
The EU deal comes on top of already historic stimulus measures adopted by global central banks and finance ministries in a bid to soften the economic blow from the coronavirus.
Here in the United States, lawmakers are working out the details of another stimulus bill, which could cost more than a trillion dollars and include a second round of direct payments. If passed and enacted, it would not only follow the $ 2.3 trillion CARES Act, but also increase the United States’ national debt, currently at $ 26.5 trillion, or 132% of gross domestic product. (GDP).
I’m also keeping my eyes on Judy Shelton, Trump’s choice to join the Federal Reserve Board of Governors. Shelton has been a longtime gold advocate and has in fact publicly supported the idea of returning to the gold standard. As unlikely as that is, I see his potential advancement to the Fed as constructive for metals and gold mining stocks. Shelton, described as “controversial” and “unorthodox” in the media, received the nod from the Senate Banking Committee earlier this week. Its confirmation now requires a simple majority vote in the Senate.
Tech stocks look extremely overvalued
All that stimulus money has benefited not only gold and other precious metals and commodities. Much of this data has surfaced in the stock market, especially tech stocks. As I have already shared with you, technology stocks are among the best performers of the year.
Many see a bubble brewing. According to a Bank of America survey, a majority of fund managers believe the group is the “most congested store” in history. You may be aware that the combined market capitalization of Apple, Amazon, Microsoft, Google and Facebook is now almost a quarter of the total market capitalization of the S&P 1500. But did you know that only four companies put together – Apple, Amazon , Microsoft and Google – are larger than the Japan’s entire stock market? That’s according to a recent quote from David Ingles of Bloomberg.
See the table below. You can see that tech stocks, as measured by the NASDAQ 100, are now more overvalued against the S&P 500 than they were during the dot-com bubble, after which the market fell almost 50%.
Click to enlarge
Need more proof of “irrational exuberance”? Google searches for “tech stocks” hit an all-time high this month, using data from Google Trends dating back to 2004.
Click to enlarge
The reason I am emphasizing this is to say that investors should proceed with caution. Make sure you are exposed to gold and precious metals. I still recommend a 10 percent weighting, with 5 percent in bullion and the remaining 5 percent in high-quality mining stocks and ETFs.
Warning: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has done everything possible to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not a solicitation to effect an exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and / or damage resulting from the use of this publication.