Gold mining stocks and the corresponding exchange traded funds have been highlighted plenty of times this year as some of 2016’s best-performing securities.
For example, the VanEck Vectors Gold Miners ETF (NYSEArca: GDX), the largest gold miners ETF by assets, has more than doubled year-to-date. GDX’s small-cap cousin, the VanEck Vectors Gold Miners ETF (NYSEArca: GDXJ), is up a staggering 160%.
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.
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]“While gold miners have flattened out this month despite rallying 117 percent from the beginning of the year, Todd Gordon of TradingAnalysis.com believes the metal is more likely to rise than fall from current levels,” reports CNBC.
Supporting the previously controversial 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.
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.
“On a daily chart of the gold miners ETF (GDX), Gordon points out that the miners have consolidated around $30. He establishes new support levels with $27.50 on the low end and $28.50 on the high end,” according to CNBC.
Gold has acted as a portfolio diversifier, especially in a post-Brexit world where volatility remains elevated. The U.S. dollar is also in a tough spot because the Federal Reserve has yet to raise interest rates this year and does not appear likely to do so.
VanEck Vectors Gold Miners ETF
Tom Lydon’s clients own shares of GDX.