Gold News

Gold Down, Biotech Stocks Up

Two assets with more in common than you might guess...
 
ONE of the greatest fears this October – possibly the most volatile month of the year – was the correlation between the S&P 500 Index's ascent in the first three quarters of the year and the possible ramifications of the end of quantitative easing (QE), writes Frank Holmes at US Global Investors.
 
It's well known that Japan and Singapore have been buying their countries' blue chip stocks with their excessive money printing. Today, about 1.8% of the Japanese market is owned by the Bank of Japan. American investors fear the Federal Reserve might do the same and take away the punch bowl, so to speak.
 
As you can see, the S&P 500 Index has been rising in tandem with government securities, and it's uncertain what will happen when QE ends. 
 
 
The Ebola epidemic has also contributed toward moving the needle to the fear side of the spectrum and driven investors to seek shelter not in gold necessarily but in so-called "Ebola stocks". For every negative, as tragic as they often are, there is a positive. When a major hurricane hits Florida, for instance, insurance stocks fall while real estate stocks rise. The deadly Ebola virus, on top of an aging demographic, has helped make health care and biotechnology pop this year. The Daily Reckoning's Paul Mampilly, in fact, calls this rally "the biggest biotech market ever."
 
Possibly. Before we get too excited, let's look at the numbers. Over the last 10 years, the S&P 500 Biotechnology Index has had a rolling 12-month percentage change of ±23. As of this writing, the index is up 32 percent, meaning it's up by only 1.3 standard deviation. In other words, biotech is behaving approximately within its expected range.
 
Gold bullion, over the same period, has had a percentage change of ±19 – not so dramatically different from biotech – and is down by 1.3 standard deviation. Again, this is "normal" behavior.
 
 
As you can see, biotech corrected and then rallied firmly into the sell zone. Seventy percent of the time, it's normal for the asset class to rise and fall one standard deviation. As I always say, each asset class has had its own DNA of volatility over the last 10 years. Knowing this helps you manage your expectations of how they perform.
 
 
Even health care and biotech companies not actively working toward finding treatments and vaccines for the virus seem to have incidentally benefited from the rally. As for gold, between mid-August and October 3, the precious metal completely ignored the fact that September is historically its best-performing month, tumbling 9 percent from $1310 to $1190. It soon rebounded in the days leading up to Diwali.
 
Gold stocks, on the other hand, have yet to recover. Since the end of August, the NYSE Arca Gold BUGS Index has plunged 25 percent to lows we haven't seen since April 2005. The Market Vectors Junior Gold Miners ETF has lost nearly 30 percent; the Philadelphia Gold and Silver Index (XAU), 25 percent.
 
On a few occasions I've pointed out that in the last 30 years, the XAU has never experienced a losing streak of more than three years. As of this writing, it's lost close to 17 percent, with only two months left. The cards are definitely stacked against the XAU, but I remain optimistic it can continue the trend. 
 
 
Many investors are understandably concerned that mining companies in West Africa will suffer because of Ebola. Several companies operating in the three hardest-hit countries have indeed been hurt by the virus, some of them being forced to halt production. However, none of our funds has any direct exposure to them. The three companies that we own in US Global Investors' gold mining funds continue to operate normally in the region.
 
Here I must remind investors that we recommend 10-percent holding in gold: 5 percent in bullion, 5 percent in stocks. Rebalance every year.

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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