Gold-mining stocks are the single best asset class to hold as markets begin reorienting to the higher interest rates that the Federal Reserve seems likely to deliver tomorrow, with gold itself coming in second.
The Fed's tightening cycle seems likely to take several months to a year or more, with so many macroeconomic variables arising that it's beyond my ability to predict what will happen to "real-economy" companies during the period.
But the bottom line for U.S. and global economies and markets is that the Fed is making a "binary" bet -- either the central bank will be correct in its expectations for accelerating U.S. growth or it will be wrong.
I last addressed this in my Nov. 11 column, We Haven't Seen the Last of Volatility -- and since then, the volatility that multiple market sectors have seen has been incredible. We've generally watched a defensive migration of capital ahead of tomorrow's Fed decision, which explains why the largest stocks have fallen the least.
Since Nov. 11, the Dow Jones Industrial Average has lost about 1.9%, while the S&P 500 has shed about 2.6% and the Nasdaq Composite dropped by about 2.25%. But the small-cap Russell 2000 has lost about 5.25%, or roughly twice as much.
That tells me that markets believe rate hikes will have an outsized impact on smaller companies' access to debt and equity capital -- a logical assumption. But my fear is that Fed expectations for U.S. expansion don't come true and rate hikes trigger a cascading series of market and economic events that hurts all asset classes.
One of the reasons I like gold-mining stocks -- besides the fact that they've already sold off to historically low levels vs. gold itself -- is that few if any have fallen since my Nov. 11 column. The Market Vectors Gold Miners ETF (GDX) has outperformed all of the broad equity indices by simply staying flat rather than declining.
Gold-mining stocks have held up well even as the commodities index (especially oil) got brutalized. This is especially noteworthy because spot gold itself has dropped by about 2% since Nov. 11. And if you look back over the past three months, GDX is actually up by around 3.4% even though spot gold has fallen 4%.
This seems to show that investors realize that gold-mining stocks have become oversold relative to gold prices themselves. More importantly, I think players increasingly see gold miners as a place to put capital to avoid the problems that a rate hike could cause for real-economy stocks.
I believe gold miners are also the best option for investors who want to either hedge a rate hike's downside risk or even speculate on its upside potential.
If the Fed is right and the U.S. economy expands, gold prices and gold-mining stocks should both appreciate. But if the central bank is wrong and rate hikes aggravate global deflationary pressures on the U.S. economy, I expect gold-mining stocks to still benefit as investors seek shelter from the real economy.