Disaster for Gold and Everything Else

by JDH on March 14, 2020

Oh boy.

On February 24, 2020 NUGT – Direxion Daily Gold Miners Bull 3x Shares NYSE + BATS, traded over $42.  14 trading days later it closed at $6.76, after trading as low as $6.  That’s an 86% drop in two trading weeks.

How’s that for volatility?

So now what?

Do we close up shop and go home?  Wiped out?  Done?

Selling everything three weeks ago would have been a good strategy, but it’s a bit late for that now.  I can tell you this: on January 19, 2016, NUGT traded at $14.33, and on August 8, 2016 it peaked at almost $143.  And then on December 12, 2016 it bottomed out at around $22.

When you play a three times leveraged ETF, massive volatility is the norm.

Year to date NUGT has dropped from around $34 to $6, and 82% decline.

Gold itself started the year around $1,551, and closed on Friday at $1,516, a decline on the year of just over 2%.

So if the underlying commodity is basically flat, why are gold stocks getting killed?  Two reasons:

First, fundamentally, if the world is in quarantine, miners won’t be able to mine, so revenue drops.  We aren’t there yet, so that’s not a big factor.

The bigger factor is that investors have diversified portfolios, and when the entire market drops, you have to liquidate something to raise cash to meet your margin calls.  If your “blue chip” stocks are hammered you can’t get much from selling them, so you sell your gold stocks, which still have value.  You have no choice; you sell the good stuff.

It’s likely that further weakness is inevitable as more selling happens.

Here’s my guess as to what happens next:

Companies and schools around the world are having employees “work from home” as much as possible, which will reduce the spread of the virus.  I assume that millions of people are already infected and don’t know it, so cases will increase dramatically over the next few weeks, but I also assume that most people will recover, and life will go on.

I’m not a doctor, but I assume once you have recovered from this virus your body builds up some level of immunity, so you are less likely to get it again.  Once more than half of us have recovered from it, we are less likely to get it again, and the spread slows down.  The warmer weather in North America will also help.

If those assumptions are correct, this is a great buying opportunity, or will be shortly.

NUGT is around $6.  Is it going down to $3?  Maybe.  But past history shows that it could be $40 in six months.  At these levels, it appears to be a good risk, as do many other stocks.

We shall see.

Wash your hands.

See you next week.