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Gold's Rally Has Miners ETFs Strutting Their Bull Market Stuff

August 29, 2019 7:28 am
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Gold's Rally Has Miners ETFs Strutting Their Bull Market Stuff

Gold's recent rally is providing predictable benefits to some other popular exchange traded funds, those being miners products, including the VanEck Vectors Gold Miners ETF (NYSE:GDX).

What Happened

Bullion is being bolstered by global central banks on multiple fronts. Not only are central banks, in both developed and emerging markets, seemingly racing to lower interest rates, many of those banks are also gobbling up gold.

The SPDR Gold Shares (NYSE:GLD), the world's largest ETF backed by physical holdings of gold, is indeed in a bull market and that status is important.

“Bull markets can be classified as either secular (long term) or cyclical (bull phases within an overall bear market),” said VanEck in a recent note. “Before its $1,400 per ounce breakout in June, gold appeared to be tracking, on a technical basis, similar to its 36-month cyclical bull market from 1993 to 1996. However, its current $1,500 price level hints at a potentially longer, sustained rally—perhaps more similar to the secular gold bull market of 2001 to 2008.”

Why It's Important

Not all gold rallies are met with corresponding upside by ETFs like GDX, but this time is proving different because miners have worked through balance sheet issues that plagued the group several years ago and have diligently reined in costs.

Those catalysts along with some valuations that still reside on the more attractive side of the ledger powering GDX and rival ETFs higher. Over the past 90 days, GLD is higher by 19.3%, but GDX is outperforming the bullion-backed fund by a margin of roughly 2.5-to-1 over that span, indicating that if this gold bull market is potentially long-lasting, GDX's year-to-date gain of 44.7% could be the start, rather than the end of something.

“Gold stocks, on average, have historically outperformed gold during gold bull market cycles in the past—including through both cyclical and secular periods,” according to VanEck. “This typically occurs because of their optionality to gold through earnings and resource leverage.”

What's Next

As for what's next for the miners, the aforementioned moves to shore up balance sheets by paring leverage could bode well for the group's fortunes should gold remain in bull market.

“For senior or mid-tier miners, these efforts could translate to nearly 60% increases in free cash flow, on average, for a gold price move from $1,400 to $1,600,” said VanEck. “We believe that this makes a compelling case for gold stocks at the moment and, in particular, given their attractive valuation on both an absolute and relative basis.”

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