Even if the exchange traded funds that hold shares of gold miners trade flat for the rest of 2014, their performance will go down as one of the best Lazarus acts in recent memory.
Last year’s list of the worst non-leveraged ETFs was a potpourri of funds holding gold and silver miners. Heading into the start of trading Wednesday, the Market Vectors Gold Miners ETF (NYSEArca: GDX), the largest gold miners ETF by assets, was up 11.6% year-to-date. So strong have mining ETFs been that GDX is nowhere close to being the best of the group. [Laggards Soar in 2014]
The PureFunds ISE Junior Silver Small Cap Miners/Explorers ETF (NYSEArca: SILJ), Global X Gold Explorers ETF (NYSEArca: GLDX) and the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) have all topped GDX this year. There may be more upside to come for these previously downtrodden ETFs and rival funds.
“With gold mining stocks trading at the lowest level since 2008, we believe they have reached a point where upside potential now far outweighs downside risks, making this a good entry point for investors with medium-term time horizons,” said ETF Securities research analyst Simona Gambarini in a note out Wednesday.
Gambarini added: “Although we estimate gold miners still may have a further US$113bn of reserves to write-down, with gold miners’ share prices down 52% over the past year and 66% over the past 3 years, we believe much of this expected write-down is already in the price. On our estimates, gold miners’ shares are currently trading at a 4% discount to their book value and many are now trading at attractive long-term accumulation levels. With the gold price having stabilised around the US$1,250oz level and general equity market sentiment expected to remain positive, gold miners appear to be in a position to outperform gold.”
The notion that miners are poised to outperform bullion is not unfounded as it has been highlighted by traders and technical analysts. [Miners Ready to Beat Bullion]
Gold miners were forced to take writedowns of $27 billion last year as gold futures tumbled, according to ETF Securities. “At the end of 2012, the dollar value of gold mining reserves assumed a long-term gold price that ranged from US$1,500oz (for Barrick Gold) to US$950oz (for Yamana Gold). With the gold price currently trading around US$1,250oz, most gold miners will have to devalue assets further and possibly close more mines,” said Gambarini.
Barrick and Yamana combine for over 19% of GDX’s weight with the former being the ETF’s largest holding, according to Market Vectors data.
While lower gold prices weighed on miners last year, the upside is forced cost containment could be starting to bear fruit in the form of rising share prices.
“All-in costs in Q3 2013 were 15% lower than in the previous quarter due to a reduction in capital expenditure and exploration costs. While this might be detrimental for miners’ production in the long run, it will likely have a positive impact on profitability and, in turn, should help support miners’ valuations,” according to Gambarini.
Buoying the case for further upside for gold miners is the last time gold futures resided around $1,250 per ounce, nearly three and a half years ago, “gold miners’ shares were trading 111% above current levels,” according to ETF Securities.
Chart Courtesy: ETF Securities