Precious Metal ETFs after Bernanke
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ben Bernanke, known as “Helicopter Ben” to his friends, gave his latest rendition of Federal Reserve double-talk last Friday from the annual meeting in Jackson Hole. Without specifically rolling out a new plan for additional quantitative easing, the Fed Chair gave what can be taken as a very strong hint. The news drove the prices of all of the major precious metal and precious metal mining exchange traded funds (ETFs) higher into the long weekend.
Given the strong showing of these ETFs, many investors are left to wonder how to participate in the sector without becoming a lemming on the fast track toward a cliff. Whether one chooses silver or gold, miners or the commodity, different choices will have different advantages and drawbacks, particularly given the longer-term view that one holds.
Not that most industry insiders expected the speech from Jackson Hole to include anything specific, but Mr. Bernanke’s language spoke very clearly – with opposite messages – to different groups of analysts. The critical language to consider stated that the Fed “will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” Miraculously, there was a group who took this to mean that the Fed intended to remain on the sidelines as a result of strengthening macroeconomic indicators. Most, including the bulk voting with their capital in the market, heard the message that QE3 is coming in September, likely at the regularly scheduled meeting.
On the commodity side of the discussion, the SPDR Gold Shares (NYSEMKT: GLD) is the best proxy for gold and the iShare Silver Trust (NYSEMKT: SLV) is the best proxy for silver; they were up 2.3% and 4.6%, respectively, on Friday.
In terms of the miners, the Market Vectors Gold Miners ETF (NYSEMKT: GDX), the Market Vectors Junior Gold Miners ETF (NYSEMKT: GDXJ) and the Global X Silver Miners ETF (NYSEMKT: SIL) are the three to consider; they were up by 4.2%, 5.5% and 5.3%, respectively. Over the past six months, as of Friday’s close, GLD has dramatically outperformed the group, down only 1%, while the junior gold miners, GDXJ, have lagged, down 18.5%. The other three are somewhat bunched in the middle.
During the most recent three months, however, the picture has shifted. Silver and silver miners have significantly outperformed, with SLV up about 12% and SIL up over 15%. This is a strong sign for the metals in general because silver tends to be more volatile due to the smaller size of that market. When one sees silver on a sustained course of outperformance it can be a signal of a bull market in the metals. From January 2010 to April of 2011, SLV and SIL appreciated by 133% and 91%, respectively, as compared to 33% and 54% for GLD and GDX.
Putting the Fed in Context
Last Friday’s price action in the major ETFs is suggestive that the real money is beginning to enter these markets in preparation for a significant move higher. While Tuesday morning’s session is not likely to be a good indicator of how things stand, as some profits may be taken and over-reaction on both sides drives price, after the initial storm, the professionals are likely to start building positions. There is likely to be a contingent that wants to argue that QE3 is now priced into the metals and the miners, but this is simply not the nature of these markets. While corrections can be fierce and expensive, these markets tend to move on every piece of news. Right now that trend is higher.
Just prior to the last crash in silver, the chat boards included, amongst others, these quotes: “I am taking a second and third mortgage so I can buy more silver,” and, after a small dip, “I don’t understand why I’ve lost money, silver is supposed to go up this year.” When the mass group-think insanity begins is when it is time to be worried.
At present, investors are remaining cautious and moving at a safe speed. While these ETFs look a bit overdone, one can still begin to build positions in these names. There may be corrections, which can be seen as buying opportunities, or they may simply run away. In the latter case, some participation is preferable to irresponsible risk. When your neighbor asks for a loan to buy more, it’s time to sell. For now, the metals are primed for a move as Ben’s helicopter prepares for takeoff.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.