Bold ETF Call Of The Day: Embracing Gold Miners
It's no secret that ETFs tracking gold miners have significantly lagged their physically-backed counterparts. That much is proven by this statistic: In the past year, the SPDR Gold Shares (NYSE: GLD), the largest physically-backed gold ETF in the world, is up 9.2% while the Market Vectors Gold ETF (NYSE: GDX), the largest gold miners ETF, is off 23.4%.
The miners vs. gold price conundrum has confounded both analysts and investors, making any bullish call on the disappointing miners bold to say the least. On the other hand, some might argue that the miners offer superior risk/reward compared to gold-backed ETFs going forward.
That's the position of Street One Financial President Scott Freeze who discussed the potential virtues of the gold miners with Benzinga today.
"If you look at miners on a historical basis, they go through periods of lagging gold futures and then a period of substantial outperformance," Freeze said. "We've seen capitulation with the miners, we've already been there. Since the miners have already been lagging, they offer more upside than downside now compared to a fund like GLD."
Regarding gold mining ETFs, Freeze has a preference for the unheralded Global X Pure Gold Miners ETF (NYSE: GGGG). The Global X Pure Gold Miners ETF debuted 13 months ago, but has just $4.6 million in assets under management compared to over $8 billion for GDX.
Freeze noted that GGGG's 26 equity holdings are all pure play gold miners, but GDX holds several silver miners including Silver Wheaton (NYSE: SLW) and Pan American Silver (Nasdaq: PAAS). GGGG's largest holding is El Dorado Gold (NYSE: EGO).
Noting that an inflationary environment could hit investors sometime over the next 15 months because of previous rounds of quantitative easing by the Federal Reserve, Free said gold is poised to outperform the other precious metals.
"Gold itself will outperform other metals and GGGG should outperform GDX though GDX should do better than GLD," according to Freeze.
Gold prices have slid recently, sending GLD down 1.18% in the past month while the rival iShares Gold Trust (NYSE: IAU) is off 1.24% over the same time, but that may not have the impact on the bottom lines of miners because many effectively hedged their production by selling gold futures contracts to lock in higher prices late last year and early this year.
"The gold miners are already hedged by having sold gold futures contracts. They're still locked in at a higher future price," Freeze said. "We've heard about some foreign companies that have done that and it bodes well for upside in the miners."
Regarding silver, Freeze said Europe's sovereign debt crisis could hamper silver production and he ranks silver third in terms of preference of the four precious metals behind gold and palladium. The iShares Silver Trust (NYSE: SLV), the largest ETF backed by physical silver, has slid 3.25% in the past month. The ETFS Physical Palladium Shares (NYSE: PALL) and the ETFS Physical Platinum Shares (NYSE: PPLT) are both down more than 5.5% over the same time.
Regarding the gold miners, Freeze said investors need to assess the risk/reward scenario.
"Investors should be looking at pure risk/reward," he said. "GLD is more expensive while GGGG has been lagging, but its underlying components should beat expectations. There's more upside and less downside with the miners compared to the physical gold ETFs."
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