Investors and hedge funds have shifted away from gold bullion in favor of mining stocks and related exchange traded funds as miners begin to reveal improved business fundamentals.
The Market Vectors Gold Miners ETF (NYSEArca: GDX), the largest gold miners ETF, has surged 26.7% so far this year, whereas the SPDR Gold Shares (NYSEArca: GLD) is up 8.7%. [Gold Miners ETF Inches Toward a Breakout]
High-profile hedge-fund managers like George Soros, John Paulson, Peter Palmedo and Eric Sprott have benefited from the surge in gold stocks this year, the Wall Street Journal reports.
Gold miners are less unloved today than they were a year ago. When prices rally, gold stocks typically outperform bullion. [Miners Keep Beating Gold ETFs]
Safe-haven bets have helped gold investors hedge against volatility in Ukraine and the Middle East. Meanwhile, investors have steered toward gold stocks as a way to capitalize on the upswings.
Mining companies generate greater revenue and profit from higher gold prices. Additionally, many have also been able to bolster earnings by expanding output and trimming costs.
Some investors also point to the sector’s cheaper valuations, compared to historical norms. For instance, the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ), which tracks a basket of small-cap gold miners, shows a price-to-earnings ratio of 13.19 and a price-to-book value of 1.03. In comparison, the S&P 500 has a P/E of 16.98 and a P/B of 2.34. [Overlooked Ratio Points to More Upside for Junior Miners ETF]
“Gold companies just don’t look as expensive as they did in previous years… and you have a sentiment that is warming toward gold,” Catherine Raw, a portfolio manager for BlackRock Inc., said in the article.
However, potential investors should be aware that gold miners have lagged gold bullion when prices declined. For example, gold prices fell 28% last year while the NYSE Arca Gold Miners index fell 54%.
“What gives me pause is that if the economy continues to show signs of strengthening, we could take another leg down in bullion prices,” Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, said in the article. “I’m not sure that gold miners, even though they’ve been punished a lot, couldn’t fall further.”
Market Vectors Gold Miners ETF
For more information on gold stocks, visit our gold miners category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of GLD.