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Could Investors’ Rotation amid the Sell-Off Benefit Gold Miners?

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Tech companies leading the sell-off

In the current sell-off, technology companies (XLK) (SMH) are leading the decline. Since these are the same companies that have seen huge upward runs in 2018, their market-leading losses aren’t surprising.

Investors’ stretched valuation concerns have been especially acute in the US tech space, meaning that tech stocks are much more vulnerable to higher interest rates.

As the risk-off sentiment takes hold in the market, investors could rotate out of more growth-oriented and expensive stocks and into relatively stable, defensive stocks. Utilities, for example, saw the lowest losses among all sectors yesterday.

Holding gold (GLD) and other precious metals is another way of diversifying risk in a volatile environment. Moreover, gold miners (NUGT) have long been overlooked by investors in the search for more yield.

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Are gold miners cheaper than broader equities?

Gold miners as a whole are looking inexpensive compared to broader equities. The average ratio of the NYSE Arca Gold Miners Index (GDX) and the S&P 500 Index (SPY) is 0.20 compared to the ten-year average of 0.68.

While broader equities’ valuations have continued to increase, the valuations of gold stocks didn’t keep the pace, and the ratio declined. Gold miners haven’t kept the pace with the growth in gold prices in recent years.

More catalysts emerging

Due to lower precious metals prices over an extended period, investors have largely ignored miners. However, many positive catalysts are emerging lately. Mergers and acquisitions (or M&A) are also picking up the pace in the sector. The most notable was the merger of Barrick Gold (ABX) and Randgold Resources (GOLD), which was announced on September 24.

The merger will create an industry-leading gold company with the greatest concentration of tier one gold assets. On September 30, silver miner and developer Americas Silver announced that it had agreed to acquire Pershing Gold (PGLC). Usually, M&As in a sector signal that it has either bottomed out or is close to it.

In the next and concluding part of this series, we’ll see how investors can position themselves in gold and in the gold mining space according to their risk appetite.

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