Barrick Gold Corporation (USA) (NYSE:ABX), Yamana Gold Inc. (USA) (NYSE:AUY), Gold Fields Limited (ADR) (NYSE:GFI), Goldcorp Inc. (USA) (NYSE:GG), and Kinross Gold Corporation (USA) (NYSE:KGC) are all rallying in afternoon trading as traders become more optimistic on gold’s prospects. Let’s take a closer look at why gold is rallying.
First a little about ourselves. We at Insider Monkey track the smart money’s moves. But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 37 month period beginning from September 2012, delivering gains of 102% (see the details here).
Gold futures are up by 0.32% in afternoon trading as investors become more comfortable with the commodity. The bearish view of gold heading to $800 per ounce hasn’t occurred and the bottom hasn’t fallen out of the commodity. While gold doesn’t have as many useful industrial applications as silver and platinum do, it is still widely regarded as a universal store of value in uncertain times. Geopolitical risk has increased in recent months as Russia bombs various Syrian anti-Assad factions and ISIS menaces various parts of the Middle East. Given the U.S presence in the Middle East, there is the potential of an unintentional U.S-Russia flareup. Proxy wars are not out of the question, and if they occur, investors will seek safe haven in gold. In addition, China recently declared some islands in the South China Sea as part of its core interests, while the U.S subsequently announced that it is considering sending warships and planes to the area to practice freedom of navigation under international laws. If an unintentional flareup between China and the U.S occurs, gold will rally too.
Another helping factor for gold prices is a range-bound dollar. After peaking in March, the U.S Dollar Index is off its highs from earlier in the year. A weaker dollar makes gold more expensive in dollars. Although the dollar could still rally as the Federal Reserve begins normalizing interest rates later this year, much of the capital inflows to the U.S have already occurred in anticipation of the event. Given the deleveraging of the average consumer around the world, the deflationary effects of lower energy prices, and the various QE programs to counteract the negative effects, gold will still be in demand.