A prime beneficiary of gold’s resurgence this year is the gold mining industry and its corresponding exchange traded funds. That includes the Market Vectors Gold Miners ETF (NYSEArca: GDX), the largest and most heavily traded gold miners ETF.
Over just the past 90 days, GDX has surged a jaw-dropping 73%. Gains like that, particularly in a short time frame, can draw skeptics. Indeed, some technical analysts have grown skeptical regarding the veracity of GDX’s recent move higher.
Strategists point out that costs keep rising, which has narrowed profit margins among gold miners. Recent mine closures have not improved margins. Current mining operations are also facing deteriorating ore grades. The recent decline in energy prices and depreciating currencies where local miners operate have also had minimal beneficial impact on cash costs.
Gold miners currently trade at about a 59% discount to gold prices since 2009, have a price-to-book value of 1.0x and an average dividend yield of 2.8%, which makes the sector look attractive from a valuation standpoint. Moreover, U.S. economic weakness and speculation of the Federal Reserve pushing back on another interest rate hike have contributed to a depreciating U.S. dollar, which has also helped support USD-denominated gold bullion.
On Wednesday, GDX “rose as much as 2.4% intraday to a 19-month high of $23.82, before reversing to close down 1.8% at $22.84, below the previous session’s intraday low of $22.92. Many technicians believe this marks the end of the previous uptrend. A close above the pattern’s high–$23.82–would be needed to negate the bearish reversal signal,” reports Tomi Kilgore for MarketWatch.
After plunging past their financial crisis lows on waning Chinese demand and concerns over a rising rate environment, mining stocks are seeing their biggest rally since 2008, Bloomberg reports.
Supporting the downtrodden sector, the U.S. dollar has quickly weakened. The greenback is being weighed down on speculation that ongoing uncertainty may force the Federal Reserve to refrain from hiking interest rates in the near future. Consequently, a weaker USD makes alternative assets like metals more attractive.
Gold assets look more attractive in a low interest rate environment as the precious metal is more competitive against assets that pay low interest, like bonds. Additionally, if the Fed holds off on further rate hikes, it would suggests the economy is not as strong, which would also help gold attract safe-haven demand.
[related_stories]Market Vectors Gold Miners ETF
