Millions of Dollars Flow Into Gold During October Correction

By Anthony Summers
Senior Research Analyst

Commodities

I have a confession…

Few things excite me more than a good correction.

And no, it’s not due to some form of deep-seated masochism. The truth is, when the ticker tape runs red, I get excited about the chance to buy stocks at a nice discount.

After all, we’re now in a technical correction. It’s not an all-out bear market.

In October, the Dow Jones Industrial Average dropped as much as 10.5% from the index’s all-time high.

The S&P 500 was down as much as 11.5% from its high…

And the Nasdaq was down as much as 14.9%.

We’re also moving into tax loss harvesting season. Investors with losses on the books will sell their positions before the year’s end in order to deduct those losses on their taxes.

So we’re in somewhat of a sell-off “black hole” right now. I wouldn’t be surprised if we saw this correction continue for a couple of months.

As a result, investors will likely begin looking for a “safe space” to weather the storm.

And what’s safer than ol’ faithful: gold?

Or even better… gold stocks.

It’s no secret that gold – and, by extension, miners – is a safe haven asset for investors. It’s also the perfect intersection between defensive investing and value investing during a correction.

Both the price of gold and shares of gold mining stocks – as tracked by the VanEck Vectors Gold Miners ETF (NYSE: GDX) – were up about 3% in October, compared with the broader market.

And investors seem to be piling in quickly.

About $5 billion in capital flowed out of the SPDR S&P 500 ETF Trust (NYSE: SPY) in October.

In contrast, nearly $200 million flowed into the iShares Gold Trust (NYSE: IAU) and more than $182 million went into the VanEck Vectors Gold Miners ETF.

The timing couldn’t be better, as many gold miners are heavily discounted at current valuations.

Take Sibanye Gold Limited (NYSE: SBGL), for example.

Sibanye is the largest gold producer in South Africa and among the 10 largest in the world.

Its shares fell big in recent years… until the last couple of months.

After hitting a low in August, shares rose 74% to breach their 200-day moving average before coming back down a bit. Sibanye ended October up 37.5%.

Over the past five years, as gold prices have remained largely flat, Sibanye has managed to churn out decent sales growth – at a rate of 25% per year in that time.

Even so, the stock’s trading at less than one-eighth of its sales per share. (Its trailing price-to-sales is just 0.12.) It’s also trading for 0.24, a quarter of its book value per share.

To me, that screams bargain buy – especially in a corrective market, where gold prices are likely to spike in the near term.

But for a less concentrated bet on a particular stock, sticking with the VanEck Vectors Gold Miners ETF may be a safer – and more diversified – bet.

If you’re in a more aggressive mood, something like the Direxion Daily Gold Miners Bull 3X ETF (NYSE: NUGT) might work well. But be mindful that there’s a double-edged sword with any leveraged play.

The ETF targets three times the daily returns on the upside and downside. So if the market pulls back up unexpectedly, your losses will be sharper than normal.

Good investing,

Anthony