Relative Performance of Gold Stocks

The quarterly meeting of the Incrementum Fund’s Advisory Board took place earlier this month (April 12), and as usual, a special guest was invited to participate. This time we were joined by well-known fund manager John Hathaway (Toqueville Gold Fund). It was a very wide-ranging discussion of the financial markets and the economy, and we hope you will agree with us that it was quite interesting (as always, a PDF containing the transcript is available for download below).


Fund manager John Hathaway, special guest at the Incrementum Advisory Board Meeting this quarter.


One of the issues discussed by John we personally found particularly interesting was his idea as to why gold stocks have exhibited such dismal performance relative to gold this year. This has happened despite the fact that nearly all intermediate and senior producers are run by new managers who seem to be doing a great many things right. One would think that with the new-found focus on cost control and capital discipline, the sector should actually outperform rather than underperform precious metals.

Undoubtedly there are a number of factors playing into this, but John believes that particularly flows into and out of leveraged and unleveraged sector ETFs are exercising an outsized influence. This does certainly ring true to us. Consider for instance the major rebalancing of GDXJ that was implemented in 2017.

The ETF had become unable to properly fulfill its tracking function as many of its component stocks simply didn’t have sufficient trading volume. Moreover, the ETF had become so large, it held more than 10% of the issued share capital in some companies. The rebalancing was terrible news for the share prices of companies about to be removed from the ETF – their shares underperformed the sector quite a bit until the exercise was finally bedded down (this happened during a period of sector-wide weakness to boot).

What we were not aware of is that the leveraged ETFs may be an even more important driver in this context. Of course the same thing that exacerbates underperformance in times when interest in the sector wanes also exacerbates outperformance when the sector is back in fashion, such as in the first half of 2016. In the long run it should all balance out, but it is still important to be aware of this, as it inter alia means that one has to be cautious about the “signaling function” of the HUI/gold ratio. We will have more on this in our next gold update.


Leveraged and unleveraged gold junior ETFs – the tails wagging the dog


John inter alia also shared a few of his picks with us, and we think he has the right idea: senior producers are likely to look for acquisitions sooner or later, as reserve replacement is becoming quite an issue for many of them. At the moment there is a strong focus on brownfield exploration and expansion, but eventually the desire to buy out companies that have made enticing discoveries will return (per experience at a time when prices have already moved up quite a bit). Given the current phase of undervaluation and neglect, there are a number of opportunities out there (patience will be required, but we believe it will be well rewarded down the road).


Stock Market Signals

One more thing we wanted to briefly remark on here – because after reading the transcript it occurred to us that it might not come across the way we intended it to – are leading signals for the stock market. Regular readers are probably well aware by now that we have devoted quite a bit of effort to looking into this issue, based on the idea that the “QE” era (now morphing into the “QT” era) has created a number of unique market distortions.

Not only that, but the markets are also subject to structural problems that did not exist before. In fact, the effect of gold sector ETF flows on the performance of gold stocks is an excellent example of such a structural problem, albeit a relatively small and unimportant one compared to e.g. the proliferation of bond ETFs and assorted systematic trading strategies.

At one juncture we briefly address initial unemployment claims, which have a well-known negative correlation to the stock market and have occasionally served as a short term leading indicator of major trend changes. The main point we wanted to make in this context is that one can simply not rely on such indicators giving timely warning signals.

Whether it is the trend in margin debt, the A/D line, unemployment claims or even more firmly anchored (from both a theoretical and empirical perspective) signals such as credit spreads, one has to be mentally prepared for being surprised –  as opposed to getting the usual combination of early warning signals that historically tended to ring the bell at major market tops and bottoms. So this is what we meant to convey.


NYSE margin debt – it is widely held that it always peaks ahead of major stock market tops, but we have found out this isn’t quite true. In 1937 it lagged stocks by one month, in 1973 it lagged them by 7 months – two of the worst bear markets in history followed.


This time we believe there will be more surprised than usual, but we can of course not prove this – it is just an educated guess. How precisely things will play out will only be known in hindsight.


Markets Underestimate “QT”

Lastly, the title of the transcript alludes to the fact that the markets appear to be underestimating the effect of the Fed’s passive “QT” operation, which consists of it no longer reinvesting the proceeds from maturing bonds in its portfolio (with the monthly amounts growing every quarter). Since “QE” has created a lot of deposit money (in addition to bank reserves – see for a detailed discussion of the mechanics here: “Can the Fed Print Money?”), it follows that “QT” will end up doing the opposite.


The decrease in assets held by the Fed is accelerating, but remains actually well behind plan at this point (this is mainly due to a technical issue in connection with agency bonds and mortgage  prepayments).


In other words, the markets and the economy are increasingly deprived of liquidity. An important point to keep in mind is that the private sector now not only has to fund the renewed acceleration in government deficit spending and the still ongoing expansion in corporate debt, but will also have to retroactively fund old debt that will no longer be bought by the Fed when it is rolled over.

This can only be counteracted by bank credit expansion, but banks are a bit hamstrung by the stricter regulations on capital adequacy introduced in the wake of the GFC. European banks in particular are still weighed down by nearly €1 trillion in NPLs to boot (and their US subsidiaries traditionally do play a considerable role in US domestic credit expansion; European banks are also big players in dollar funding markets overseas and in certain sectors such as commodity-related financing).

Anyway, the upshot is that it will become increasingly difficult to keep all the bubble plates in the air, so to speak.

A lot more was discussed during the meeting – below is the download link for the transcript. Enjoy!


Download Link:

Incrementum Advisory Board CC, Q2 2018 – Markets Underestimate QT (PDF)


Charts by: StockCharts, SentimenTrader, St. Louis Fed




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


2 Responses to “Special Guest John Hathaway – Incrementum Advisory Board Meeting, Q2 2018”

  • All-Your-Gold-Are-Mine:

    Wow jks… what happened to you!? Yes, mining is a tough business reflected in the price of gold. However, not all stocks go to zero. Sorry this happened to you. You need to learn from your past experience and quit listening to those brokers and “promoters” that brought you the misfortune. Instead, learn to research yourself. You may not become an expert, but you will definitely be far more adept to finding analysts that have long histories of picking winners. There are many miners that were wildly successful. Not all management is equal. You could start by reading some books on that subject. Don’t be a whiner or a quitter – good luck!

  • jks:

    “…One of the issues discussed by John we personally found particularly interesting was his idea as to why gold stocks have exhibited such dismal performance relative to gold this year. This has happened despite the fact that nearly all intermediate and senior producers are run by new managers who seem to be doing a great many things right. One would think that with the new-found focus on cost control and capital discipline, the sector should actually outperform rather than underperform precious metals…”

    I can only speak for myself as a former junior miner investor. The sector is infested with the most aggressively dishonest cheats of any industry I’ve ever had the misfortune to deal with. The slime oozes from every pore, including the exchanges, the brokers, the clearing houses, the miners themselves, and especially the promoters that shill the stocks. If by some miracle you happen to own a mine that isn’t a hole with a liar at the top, there are worker strikes, OSHA attacks, EPA assaults and any number of other regulatory or legal quagmires that always seem to send the stock you own to zero no matter the price of the metal.

    Word gets around.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Stock Market Manias of the Past vs the Echo Bubble
      The Big Picture The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.   Who's who in the zoo in...
  • How the Global Trade Contraction Begins
    Historical Evidence The world grows increasingly at odds with itself, with each passing day.  Divided special elections.  Speech censorship by Silicon Valley social media companies.  Increased shrieking from Anderson Cooper.  You name it, a great pileup is upon us.   It was probably Putin's fault (just a wild guess) [PT]   From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come...
  • TARGET-2 Revisited
      Capital Flight vs. The Effect of QE Mish recently discussed the ever increasing imbalances of the euro zone's TARGET-2 payment system again in response to a few articles which played down  their significance. He followed this up with a nice plug for us by posting a comment we made on the subject. Here is a chart of the most recent data on TARGET-2 available from the ECB; we included the four largest balances, namely those of  Germany, Italy, Spain and the ECB itself.   The...
  • Gold Sector – An Obscure Indicator Provides a Signal
    The Goldminbi In recent weeks gold apparently decided it would be a good time to masquerade as an emerging market currency and it started mirroring the Chinese yuan of all things. Since the latter is non-convertible this almost feels like an insult of sorts. As an aside to this, bitcoin seems to be frantically searching for a new position somewhere between the South African rand the Turkish lira. The bears are busy dancing on their graves.   Generally speaking bears have little to...
  • When the Freaks Run Wild
      Conditioned to Absurdity The unpleasant sight of a physical absurdity is both grotesque and interesting.  Only the most disciplined individual can resist an extra peek at a three-legged hunch back with face tattoos.  The disfigurement has the odd effect of turning the stomach and twisting the mind in unison.   Francesco Lentini, the three-legged man. Born in Sicily in 1881 with “three legs, four feet, sixteen toes and two pair of functioning genitals” he made a career of...
  • What Have You Done For Me Lately? Precious Metals Supply and Demand
      Aragorn's Law or the Mysterious Absence of the Mad Rush Last week the price of gold dropped $8, and that of silver 4 cents.  There is an interesting feature of our very marvel of a modern monetary system. We have written about this before. It sets up a conflict, between the perverse incentive it administers, and the desire to protect yourself in the long term.   Answer: usually when it is too late... [PT]   Consider gold. Many people know they should own it. They...
  • An Inquiry into Austrian Investing: Profits, Protection and Pitfalls
    Incrementum Advisory Board Discussion Q3 2018 with Special Guest Kevin Duffy “From a marketing perspective it pays to be overconfident, especially in the short term. The higher your conviction the easier it will be to market your investment ideas. I think the Austrian School is at a disadvantage here because it’s more difficult to be confident about your qualitative predictions and even in terms of investment advice it is particularly difficult to be confident in these times because we...
  • Climbing the Milligram Ladder - Precious Metals Supply and Demand
    FRN Muscle Flexing Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver. It’s less uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.   Even the freaking leprechaun is now offering government scrip...  this really...
  • Introducing the Seasonax Web App
      Closing the Affordability Gap Up until recently, the Seasonax app was only available to users of Bloomberg or Reuters terminals, putting it out of reach of most non-institutional investors. This has now changed. A  HYPERLINK ""web-based version has become available which anyone can use, and it comes at a much lower price point as well. When visiting the site where the app is hosted, this is the welcome screen:   Featured patterns at the Seasonax web app...
  • Wall Street - Island of the Blessed
    Which Disturbance in the Farce can be Profitably Ignored Today? There has been some talk about submerging market turmoil recently and the term "contagion” has seen an unexpected revival in popularity – on Friday that is, which is an eternity ago. As we have pointed out previously, the action is no longer in line with the “synchronized global expansion” narrative, which means with respect to Wall Street that it is best ignored.   Misbehaving EM currencies – the Turkish lira...
  • Fundamental Price of Gold Decouples Slightly - Precious Metals Supply and Demand
    The Fundamental Price has Deteriorated, but... Let us look at the only true picture of supply and demand in the gold and silver markets, i.e., the basis. After peaking at the end of April, our model of the fundamental price of gold came down to the level it reached last November. $1,300. Which is below the level it inhabited since Q2 2017. We will look at an updated picture of the supply and demand picture. But first, here is the chart of the prices of gold and silver.   Gold and...
  • The Fake Promise of Adult Day Care
      Cold Dark Clouds The sun always shines brightest in the northern hemisphere during summer’s dog days.  Here in America, from sea to shining sea, the nation burns hot.  But, all the while, cold dark clouds have descended over the land of the free.   In case you ever wondered - yes, they really did say it... [PT]   For example, Senator Mark Warner – an absolute goober – is currently running interference for the Democrats on a proposal to silence political...

Support Acting Man

Item Guides


The Review Insider

Dog Blow

Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

Buy Silver Now!
Buy Gold Now!