By Michal Lodziana,
The precious metals mining market has experienced tremendous volatility these past few weeks, with the GDXJ junior gold miners index (NYSEMKT: GDXJ) crashing down to a bottom of 41.76 on August 31.
This represents a decline of more than 18 percent from its recent peak of 51.70 just two weeks before.
While such volatility is to be expected in a highly speculative market like gold, naturally, many investors are wondering what caused the sudden move.
Renowned investor and economic commentator Peter Schiff believes the Federal Reserve is ultimately responsible.
In a recent podcast, Schiff stated, “Nobody cares what the numbers actually are. They only care about what the Fed is going to say about the numbers.
What they say, supposedly, indicates what they might eventually do. So, it all boils down to ‘what is the Fed going to do?’ Nothing is real. Nothing else matters.”
In the above quote, Schiff is referencing the seemingly “hawkish” statements from Fed officials made in late August. These comments largely caused the recent bottoming of gold and its respective miners, as traders have overreacted to them.
This is largely because gold is considered a non-yielding asset, which does not produce income. So when potential rates hikes are on the table, the opportunity costs of holding onto gold increase.
While things momentarily looked rather dire for the precious metals market, a disappointing August job report gave gold a huge lift.
CNBC analyst Jeff Cox reported that the U.S created 151,000 jobs in August vs. an expected 180,000.
Given that the Federal Reserve is largely data dependent, the August jobs report, along with disappointing manufacturing and service growth data, slashed the possibilities of a rate hike.
The CME Group’s FedWatch tool suggests that there is only a 24 percent chance of a September rate hike.
Though the odds of a rate hike remain low, uncertainty once again reintroduced itself on September 9, as Federal Reserve Bank of Boston President Eric Rosengren stated, “a reasonable case can be made for tightening interest rates”.
This persistence to hike rates in the midst of bad data has left many investors confused, as the Fed has promised in the past to only raise rates when positive economic data allowed for it.
This renewed rate-hike talk one again took a toll on the fragile gold market, as the GDXJ (NYSEMKT: GDXJ) and GDX (NYSEARCA: GDX) fell 7.09 and 5.45 percent respectively.
With the most recent sudden reversal, several analysts including Jordan Roy-Byrne of The Daily Gold, believe that the correction the miners will likely persist for some time longer. Jordan commented, “The failure of Gold and gold stocks to sustain recent gains, coupled with a strong selloff to close the week dashes any hope that the correction ended last week”.
Overall while gold miners remain very volatile, they are expected to do well going forward.
Like many other gold analysts, Byrne believes that the gold mining sector is in a bull market, and that dips of 15-20 percent are perfectly normal and healthy for such a speculative sector.
No bull market can go straight up, and this recent dip may prove to be an excellent buying opportunity for long-term investors.
A version of this article appeared in the Tuesday, September 13th print edition.
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