Rising interest rates are believed to be a death knell for gold, but the SPDR Gold Shares (NYSEArca: GLD) is up 2.7% over the past 90 days, a period in which 10-year Treasury yields have surged 17.5%.
Although GLD and its gold ETF brethren have defied interest rate logic, investors are not waiting around to see how long that trend will last. GLD has lost more than $26 million in assets under management this year, but second-quarter departures from the fund total $1.2 billion, enough to knock GLD from the ranks of the 10 largest ETFs. [Euro-Denominated Gold ETF Shines in Commodity Space]
Somewhat quietly, gold miners ETFs have been even better as of late. The Market Vectors Gold Miners ETF (NYSEArca: GDX), the largest and most heavily traded gold miners ETF, is higher by 4.2% over the past three months while its small-cap companion, the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ), has surged 13.6%. Some market observers are forecasting more bullishness for the miners. [This ETF is Ready to Rally]
“Take a look below at the price ratio of GDX relative to our newly created Beta Rotation Index (BETAEQ). The Beta Rotation Index rotates around the S&P 500 and defensive sectors based on our Dow Award-winning paper. The index is particularly powerful because as a “smart beta” index, it has been shown over a market cycle to outperform the S&P 500 by being defensive at the right time (on average). As a reminder, a rising price ratio means the numerator/GDX is outperforming (up more/down less) the denominator/BETAEQ. Note that the ratio has flat-lined and may be basing against equities,” writes Michael Gayed of Pension Partners for MarketWatch.
Investors are missing out. During the current quarter, GDX has bled almost $349 million in assets while $159.1 million has been pulled from GDXJ.
Still, there are encouraging signs for the miners, including dwindling levels of hedging activity.
“Low levels of interest in hedging were illustrated by net hedging of just 5t during the first quarter. Shareholders remain unreceptive towards the activity and we expect supply from this source to stay relatively low (certainly compared with historical levels) over 2015 as a whole,” according to the World Gold Council. “The outstanding global hedge book currently hovers around 200t, up from below 100t at the end of 2013. A number of producers initiated small positions in 2014, but were eclipsed by both Polyus Gold’s hedge of around 88t of production and Fresnillo’s roughly 47t hedge in the closing months of the year. Deliveries into these positions will eat into the outstanding hedge book, but spread out over the next three to- four years the quarterly impact will be minor.”
Miners hedge production to lock in current prices for future output and the lack of recent hedging could be a sign that the companies extracting gold from the earth do not expect the yellow metal to fall much further.
Chart Courtesy: MarketWatch, Michael Gayed