Precious metals-related exchange traded funds have been among the best performers this year. However, there may soon be more diverging performances as the rally grows long in the tooth.
ETFs that track silver and gold miners have been the best performers this year, with the PureFunds ISE Junior Silver Small Cap Miners/Explorers ETF (NYSEArca: SILJ) up 107.1% and iShares MSCI Global Gold Miners ETF (NYSEArca: RING) up 80.1% year-to-date.
However, the sudden surge has left the sector looking pricey. For instance, SILJ shows a 22.4 price-to-earnings ratio and RING has a 22.9 P/E ratio. The Market Vectors Gold Miners ETF (NYSEArca: GDX), the largest gold mining-related ETF, is trading at a 31.1 P/E. In contrast, the S&P 500 shows a 18.1 P/E.
“The gold miners do have a high beta to the gold price, which is currently a 2 although the recent price moves do not reflect the fundamentals in our view,” Nitesh Shah, commodity strategist director at ETF Securities, told ETF Trends. “Particularly cash costs have not fallen despite falling energy costs, and recent aggressive capex cuts are likely to bite into profitability in the coming years. At current prices we see valuations as over extended at this point, we therefore see the recent rally as an opportunity to take profits.”
Physical bullion, though, could continue to strengthen ahead. For instance, Shah believes gold could gain momentum as an alternative investment on increased political risks, notably in the U.K., U.S. and some parts of Europe, reports David Thorpe for What Investment.
Meanwhile, in the emerging markets, the rising middle class has increased its demand for precious metals.
[related_stories]“China and India are the largest consumers of physical gold accounting for more than 55% of jewelry demand and 40% bar and coin demand,” Shah said. “While in many developed markets gold is bought when fear and uncertainty increase, in China and India rising prosperity drives demand for the metal higher.”
Year-to-date, the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and the ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) have increased 18.3%.
Additionally, investors may turn to other precious metals, like palladium, which may strengthen on increased industrial demand in a steadily improving global economy.
“Palladium’s performance has lagged gold’s performance by quite some margin this year,” Shah added. “However, with improving industrial demand and tightening emission standards, palladium is likely to benefit from a cyclical upswing.”
The ETFS Physical Palladium Shares (NYSEArca: PALL) has dipped 2.8% year-to-date but rose 15.8% in the past three months.