Well, maybe. Year-to-date it has been, no pun intended, fools gold betting against gold and gold miners exchange traded products such as the VanEck Vectors Gold Miners ETF (NYSEArca: GDX) and the VanEck Vectors Gold Miners ETF (NYSEArca: GDXJ).
As has been previously documented, most of the best-performing non-leveraged ETF this year are gold and silver miners ETFs, a group that includes GDX and GDXJ. The rapid rise of these ETFs and their rivals has some market observers questioning whether near-term pullbacks are looming.
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.
Related: 4 Gold ETFs to Diversify a Multi-Functional Portfolio
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. Consequently, a weaker USD makes alternative assets like metals more attractive.
[related_stories]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.
GDXJ “has been historically volatile and as of the end of April, the ETF’s portfolio had a weighted average PE of 29.4x TTM earnings and traded at 1.46x book value. Gold’s rally YTD has undoubtedly been a positive trend for gold miners, however given the ongoing risks to the gold rally and underlying issues at the Market Vectors Junior Gold Miners ETF’s constituent firms, investors should remain cautious in investing in gold mining companies or related ETFs,” according to a Seeking Alpha analysis of GDXJ.
Related: 31 Gold ETFs Investors Should Size Up
While gold miner stocks and sector-related exchange traded funds look cheap after underperforming broader equities for years, some caution investors against betting too heavily on this area of the market as the sector rallies on strengthening bullion prices.
“While gold prices are certainly beneficial to the junior gold miners, which often produce at the margin, the companies have suffered from a weak gold price environment in recent years and many have less than stellar balance sheets,” adds Seeking Alpha.
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VanEck Vectors Gold Miners ETF
