Bob’s Journal 8/29

A Potential Opportunity in Gold Mining Stocks

Investors who follow the headlines know that gold has paced the markets in 2024, recently reaching record highs.

But few investors realize that, unlike most periods in the past, stocks of gold mining companies haven’t kept pace with the price of the metal.

Historically, stocks of gold miners move in the same direction as gold and make bigger percentage moves than the metal itself. The stocks will rise more than gold in bull markets and fall more in bear markets.

Buying the stocks of gold miners often is like making a leveraged investment in gold.

There have been times in the past when prices of gold and the mining company shares diverged. But the divergences didn’t last and never have been as significant as the current deviation.

For example, in the last five years, gold is up about 60%. But the ETF iShares MSCI Global Gold Miners (RING) is up only about 35%.

What’s even more interesting is that shares of gold mining companies based outside Asia have done even worse. The ETF Sprott Gold Miners (SGDM) is up only about 20% over five years.

A possible reason is that western investors haven’t been much interested in gold since inflation peaked in mid-2022. So, they also aren’t interested in shares of gold mining companies.

The surge in gold’s price has been due to buying by non-western central banks, plus consumer buying in Asia, primarily in China and India.

Investors in those areas also are interested in shares of gold mining companies but focus on companies in their region.

The result is that shares of gold mining companies, especially those based in the West, are generating strong free cash flow from higher gold prices, much more cash flow than the companies in the broader stock indexes, but are trading at low prices relative to their cash flow.

Investors are starting to notice. Shares of gold miners bottomed in March, and in the last month the exchange-traded funds (ETFs) surged ahead of gold for the year to date. But the non-Asia mining shares are barely ahead of the price of gold in 2024.

RING is up 7.65% in the last four weeks and 18.35% over three months. Its average annual return over five years is 8.38%.

SGDM is up 5.66% over the last four weeks and 12.94% over three months. Over five years, its average annual return is 4.98%.

The gold-owning ETF iShares Gold Trust (IAU) gained 4.26% in the last four weeks and 7.62% in the last three months. Its average annual return over five years is 10.16%.

There’s a lot of ground for the mining shares to make up, unless you expect gold’s price to tumble.

There’s no guarantee, of course, that the mining shares will continue their recent rally. But they do have a lot of free cash flow that can go to the bottom line or be used to buy back shares. Most miners haven’t taken on too much debt or aggressively expanded production facilities in recent years.

With the Fed and other central banks reducing interest rates, gold mining stocks are a good opportunity for investors who want to be aggressive with a small portion of their portfolios.

818,000 Jobs Disappear

In its annual revision of the employment data, the Department of Labor stated that the initial employment reports issued over the 12 months through March 2024 overestimated the number of new jobs by 818,000.

One of the problems with using the Labor Department’s jobs data to assess the economy is that the numbers are estimates that are regularly revised.

The jobs data are based on surveys, not hard data. The surveys themselves should be used with caution, because it is more and more difficult to convince people to participate in surveys. Also, the data is self-reported by participants, so it might be inaccurate.

Each month after tabulating the survey results, the Labor Department combines it with trends and other recent data to make the initial estimates. The department also will revise the numbers issued the previous month.

Annually, the department compares the estimates of the previous 12 months with the unemployment insurance tax records of each state. That data provides more solid numbers, but there’s a substantial lag in obtaining the data.

Early each year, another revision will be done using additional data, resulting in the official jobs data being issued in February.

The latest report reduced the estimated number of jobs created by 818,000, the largest reduction since 2009.

The revision means an average of 178,000 new jobs were created each month during the 12 months ending March 2024, instead of the 242,000 in the initial estimates. That’s a 28% reduction in the number of jobs created during the last 12 months.

But it’s risky to conclude from the latest estimate that the economy was much weaker than originally reported. That’s because in each of the last four years the final revision increased the number of jobs that were estimated in the first major revision.

Based on the pattern of recent years, economists at Barclay’s forecast that the jobs reduction in the final revision issued next February will be about half the number in the recent revision.

Incomplete Beneficiary Designation Results in Another Lost Court Case

I continue to see court cases in which the logical beneficiary of a retirement plan is denied the benefits because of an incomplete or outdated beneficiary designation.

In the latest case, a woman worked for Kaiser Permanente in California for more than 20 years.

She died without ever having a spouse, domestic partner, child or other dependent. Her sister filed a claim for benefits under the employer’s retirement plan. The claim was denied.

The employer stated that the deceased employee hadn’t completed a beneficiary designation for the plan. In addition, the sister was not a spouse, child or dependent, so under the plan she wasn’t a default beneficiary for cases in which the employee hadn’t designated a beneficiary.

The sister stated that her deceased sister began an online beneficiary designation and substantially complied with the designation process. The sister said she should receive the benefits under that designation.

But the plan’s rules state that all the steps of the designation process must be completed before a designation will be accepted. If the procedure in the plan documents had been less specific or complete, the court said it might have accepted that the late employee had substantially complied with the process.

But the plan documents were clear and definitely required that all the steps had to be completed and the employee had to receive an email confirmation from the plan stating that the beneficiary designation was accepted.

Therefore, the court ruled that the sister was not the designated beneficiary of the retirement plan.

It’s not clear from the court case what happens to the benefits, but language in the case implies that the benefits revert to the retirement plan.

The case is another cautionary tale that should remind us to review beneficiary designations every few years. Important designations are for retirement plans and accounts, life insurance and annuities.

The Data

The Consumer Confidence Index from The Conference Board rose to 103.3 in August from 101.9 in July. Consumer assessments of both the present situation and expectations for the near future increased.

The Expectations Index was above 80 for the second consecutive month in August. The Conference Board says a reading below 80 typically precedes a recession.

Existing home sales increased 1.3% in July, ending four months of declines, after falling 5.1% in June.

The median existing home sales price in July was $422,600, 4.2% higher than 12 months earlier.

New home sales jumped 10.6% in July after declining 0.6% in June. It was the highest monthly percentage increase since August 2022. The number of new homes sold in July was the most in one month since May 2023.

The S&P Corelogic Case-Shiller Home Price Index increased 0.6% in June after rising 1.0% in May. Over 12 months, the index was up 6.5% through June and 6.9% through May.

The FHFA House Price Index fell 0.1% in June after being unchanged in May. Over 12 months, the index rose 5.1% through June and 5.9% through May.

The Kansas City Fed Manufacturing Index increased to 6 in August from negative 12 in July. That’s only the second positive reading in the last 12 months and the highest level since August 2023.

The Dallas Fed Manufacturing Index improved to negative 9.7 in August from negative 17.5 in July.

The August level is the highest for this index since January 2023. Its last positive reading was in August 2022.

The Richmond Fed Manufacturing Index fell to negative 19 in August from negative 17 in July.

The PMI Manufacturing Index Flash reading through mid-August fell to 48.0 from the end of July’s 49.6.

PMI’s Service Index Flash reading was 55.2 in mid-August, up from 55.0 at the end of July.

The PMI Composite Index Flash declined to 54.1 in mid-August from 54.3 at the end of July.

Durable goods orders increased 9.9% in July following a 6.9% decline in June. Transportation accounted for a large part of July’s increase.

Durable goods orders minus defense and aircraft orders, which is considered a good measure of business investment, declined 0.1% in July after rising 0.5% in June.

New unemployment claims increased by 4,000 to 232,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.863 million from 1.859 million.

The Markets

The S&P 500 rose 0.51% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.06%. The Russell 2000 increased 2.84%. The All-Country World Index (excluding U.S. stocks) added 1.62%. Emerging market equities advanced 0.09%.

Long-term treasuries lost 0.71% for the week. Investment-grade bonds increased 0.18%. Treasury Inflation-Protected Securities (TIPS) added 0.45%. High-yield bonds gained 0.49%.

On the currency front, the U.S. dollar declined 0.82%.

Energy-based commodities increased 2.01%. Broader-based commodities rose 1.34%. Gold gained 0.42%.

Bob’s News & Updates

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