The VanEck Vectors Gold Miners ETF (NYSEArca: GDX), VanEck Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) and rival gold miners funds are among the best-performing exchange traded funds. As is the case with GDX and GDXJ, the two largest gold miners ETFs, many gold and silver miners funds have more than doubled year-to-date.
That is not stopping some traders from forecasting more upside for this scorching hot corner of the ETF space. Additionally, there is at least one positive fundamental catalyst that potentially bodes well for gold miners ETFs going forward: Peak production of gold has likely come and gone, perhaps indicating that supply will dwindle, thereby boosting bullion prices.
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.
According to CNBC: “The gold miners have skyrocketed this year, with the ETF tracking the group (GDX) more than doubling in 2016. And Todd Gordon of TradingAnalysis.com says the gains aren’t over yet.
“The gold market, the underlying gold futures and the gold miners continue to hold a strong bid despite the stock market breaking all-time highs,” Gordon said Tuesday on CNBC’s “Trading Nation.”[related_stories]
There is at least one positive fundamental catalyst that potentially bodes well for gold miners ETFs going forward: Peak production of gold has likely come and gone, perhaps indicating that supply will dwindle, thereby boosting bullion prices.
Said another way, during gold’s bear market, miners looked to improve their balance sheets by cutting production and selling assets. So even as gold prices surge, there is not a rush within the mining sector to immediately boost production.
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.
“More specifically, Gordon believes that GDX could move through to $32 if the UUP continues its current trend. To play the GDX for the upside, Gordon buys the 31-strike calls expiring on the first Friday in September, and sells the 32-strike calls of the same expiration, an overall bullish play that has him paying $0.43 per share, or $43 per contract,” according to CNBC.
For more information on the Gold ETFs, visit our Gold category.
VanEck Vectors Gold Miners ETF