By the ETF research team at Direxion Investments.

Getting giddy for gold miners

Negative-yielding debt has declined from its all-time peak, but it still represents close to 24% of all global bonds.

Until recently, the idea of negative-yielding debt was unfeasible to many and now it is nearly a quarter of all debt issued around the world. Even $900 billion of corporate bonds trade at negative yields highlighting the pervasiveness of this phenomenon.

Along with increased uncertainty about the direction of the economy, even as equity markets continue to reach new all-time highs, negative rates have contributed to driving up the price of gold as an asset class that famously offers no yield.

And, when a large portion of the fixed income market generates less than that, nothing may actually be an attractive alternative!

Source: Direxion.

Don’t fight the Fed

Gold has fallen from its recent highs as the market reacts positively to favorable Brexit news and progress on a trade deal between the US and China.

If traders believe that more monetary policy easing is coming, gold bullion and gold mining equities should remain on traders’ radars.

More rate cuts, forward guidance, inflation targeting, and increased asset purchases could all be on the table in 2020 as the Fed looks to support this recovery and remains focused on financial markets.

What would really make the outlook for gold more positive is an increase in inflation should aggressive monetary policy be successful at boosting the economy.

This comes at a time when there is increased discussion about fiscal stimulus even as government debt levels have grown. According to Deutsche Bank, the total level of debt to GDP has increased from 225% in 1999 to 319% in 2019 as many in government no longer believe that inflation is a concern.

However, traders do not have the luxury to wait and see whether monetary policy or fiscal policy will cause the inflationary boogeyman to come out of hiding. So, what should they look for in the short-term?

In the near term, look to inflation expectations to gauge whether the investment community believes that pricing pressures may be sustained as they remain consistently lower than prior to the Global Financial Crisis and even the years after.

More recently, the Federal Reserve has noted that low inflation is one of the reasons that they put their rate hiking cycle on hold, but a case can be made that the potential for pricing increases may be found by keeping rates lower for longer, especially if the economy starts to grow materially.

In addition, any weakness in the consistently strong US dollar would be a tailwind for gold as well. This may be coming soon as the economy outside the US is showing some green shoots in manufacturing.

So, while traders can use gold bullion to gain access to this opportunity, gold mining stocks may be optimal thanks to their higher beta to the price of gold. In other words, as the broader investment community continues to balance the weak economic picture with the favorable financial market perspective, nimble traders can use gold mining stocks as their means to take either side of the trade.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)