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The Tidal Financial Group (Tidal) expanded rapidly over the last decade and encompassed multiple ETF related brands including Toroso Investments, Tidal ETF Services, and the ETF Think Tank. Going forward all activity will be unified under the Tidal brand as we become one company, dream, family, and platform focused on holistic ETF customer solutions.

Is It Time to Mine Gold?

Will Investor Demand Lead to FOMO in the Gold Miners?

After recent years of consolidation, gold and precious metal mining ETFs are up about 30-40% YTD, which is a great set up for investor FOMO. To explore this possibility, the ETF Nerds have invited Otavio “Tavi” Costa into the Portfolio Manager Hot Seat during the Get Think Tanked Happy Hour. Tavi is a Portfolio Manager from Crescat Capital and is very well known on social media for his charts and graphs. To prepare for the call, here is a link to listen to a summary of a recent 30 minute presentation. As an activist and hedge fund manager, Tavi is anything but passive in his approach and his passion to make his case.

Gold is often viewed as a hedge against macro-economic weakness, inflation, and currency volatility. Investors and advisors may also be interested to learn that revenue growth from higher prices makes for very strong fundamental momentum trends for this sector. Moreover, after years of holding back on cap expenditures, free cash flow by the miners is, arguably, finally set to show meaningful growth that could lead to industry consolidation, or simply favorable conditions for additional drilling.

The disparity of performance returns in the gold mining ETFs is wide and reflects how structure matters. To highlight this issue, we use the ETF Think Tank Comparison Tool. Note that there is a 42% overlap between the two largest, VanEck Vectors Gold Miners ETF (GDX) and VanEck Vectors Junior Gold Miners ETF (GDXJ), and the next closest ETF is the iShares MSCI Global Gold Miners ETF (RING), at 27%. The US Global GO Gold & Precious Metal Miners ETF (GOAU) has only a 9%, and is highlighted because of its outperformance and emphasis on the royalty companies. Some critics of the high-risk mining industry see the royalty companies preferred return stream status and better business model as a better access point to the gold trend.

Central Banks and FOMO: Are Tavi’s Points New, or have Conditions Changed?
  1. Tavi sets the rational for being long the miners as follows: Central Bank is artificially leading a mispricing of credit with very low or even negative interest rates, and creating excessive optimism around precarious fundamentals conditions.
  2. Bond volatility reflects complacency, but in the “MOVE Volatility Index Chart,” he highlights concern. He argues that this makes broad markets vulnerable to the degree of change against a backdrop of relatively high broad stock market multiples. When change occurs, valuations will hold up where free cash flow is most sustainable.

  3. Gold prices should hold up because of the supply/demand imbalance, expectations for inflation, and global Central Bank support.

Stock market performance is questionable, led by technology stocks whose valuations are driven by momentum of expectations. Broad stocks have done nothing but become more expensive. The scatter gun approach may not work in the future? Growth stocks have held up – driven by technology and certain specific niche themes that are aligned with market dynamics. Thematic investing is the future because it allows the investor to capture specific alpha generating growth trends as markets are changing. The performance by precious metals is evidence of this fact, and a breakdown of the 167 thematic ETFs will follow in a future Weekly Blast about ETF Innovation.

In the past, we have written about the high expectations for Apple stock, now worth $2 Trillion. However, Tavi’s Free Cash Flow Estimate chart further drives the point about vulnerability. Note; Apple reports financial results on October 29.

Questions, Discussion and Debate for Get Think Tanked this Week:
  1. Powell is committed to low interest rates and increasing the velocity of money to accelerate inflation. The move index mostly has traded in a narrow range. What might be the trigger for the expansion of the range?
  2. If central banks like in Switzerland (SNB) and Japan (BOJ) can print money vs GDP on an almost infinite basis, why can’t the US central bank do the same? Does this not mean that there is a lot of room for expansion of its balance sheet. (See first chart in the beginning)
  3. Gold Miners, as measured by GDX and GDXJ, are 85% off the bottom on March 19, while gold is up about 47% and the QQQs are up 61%. How is it that the miners are not seen as a little “Bubbalicious”? Is straight gold a better play for these conditions? Where should multiples on the group be?
  4. The bear case about equity markets has been made by many. Can the miner go up further without the broad equity market going down?
  5. China – US Trade relations? Where does he stand?
Conclusion

Asking the questions is easy. The Get Think Tanked Happy Hour is about dialogue and open mindedness, combined with a little fun! Thank you Tavi for joining us. Insights have value!

Disclosure

The information provided here is for financial professionals only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit.  While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).

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