Gold and gold-related assets, including miners exchange traded funds, fell Wednesday after the release of the Federal Reserve’s July meeting minutes that revealed the U.S. central bank is comfortable with the idea of raising interest rates.
The VanEck Vectors Gold Miners ETF (NYSEArca: GDX), the largest gold miners ETF, fell 1.4% on the Fed news. However, it must be noted that the Fed did not give a specific timeframe for when it could raise rates again. As investors have already learned this year with gold and gold miners, the longer rates stay low, the better for gold-related assets.
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield.
Barrick Gold Corp. (NYSE: ABX) has nearly tripled year-to-date. The stock has been strengthening after recently reporting strong earnings on increased operating efficiency, despite revealing a second quarter dip in revenue year-over-year. ABX is the largest component in GDX’s portfolio, accounting for 10.4% of the ETF’s holdings.
“With some high profile institutional investors exiting or reducing their gold exposure, one would be tempted to exit GDX, especially as the Fed indicates at least one rate hike this year. But I believe that gold and GDX, especially, has further upside. The first reason is that the pace of rate hike will be gradual,” according to a Seeking Alpha analysis of GDX.
The Fed’s reluctance to raise interest rates is contributing to a weaker dollar, which has also helped support USD-denominated gold bullion. Consequently, a weaker USD makes alternative assets like metals more attractive.
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“Even if gold prices do not see substantial upside from here but manage to find support at around $1300-$1350 an ounce, it will be positive for mining companies. Remember during the last three years, gold mining companies have significantly reduced their costs as I had noted in an article a few months ago. This means that margins will remain strong even if gold does not see upside from current levels,” adds Seeking Alpha.
For more information on the gold market, visit our gold category.
VanEck Vectors Gold Miners ETF
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