Broader mining and materials sector exchange traded funds, such as the SPDR Metals & Mining ETF (NYSEArca: XME) and the Materials Select Sector SPDR (NYSEArca: XLB) have been durable performers this year, something many market observers attribute to the Federal Reserve holding off on raising interest rates.
Many industrial metals and miners rallied on the belief that China would support growth through stimulus measures, augmenting demand for metals while enticing investors to jump back in. Moreover, the depreciating U.S. dollar made USD-denominated resources cheaper for foreign buyers. The ongoing global low-yield environment also pushed investors toward more attractive assets, like commodities.
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Federal Reserve Chair Janet Yellen has maintained a dovish stance throughout the year, and most observers anticipate the Fed chief will likely raise rates at least one time this year, maybe in December. Looking at the fed fund futures market, options traders place a roughly 50-to-50 percent change of a 25 basis point hike at the December meeting.
“Two years ago Allianz Global Investors released an excellent study comparing the returns of different asset classes during Fed rate-hike cycles. The German firm with assets under management of $521 billion, looked at the six tightening periods since 1983,” reports Frik Els for Mining.com.
[related_stories]The report cited by Mining.com indicates a rate hike or tightening cycles do not always doom commodities and metals, noting “Commodities – and notably industrial metals and energy, which are the most growth-sensitive subsectors – did particularly well, with an average gain of more than 25%.”
In theory, gold would be less attractive in a rising rate environment as the hard asset does not offer a yield and it will be pressured by a rising dollar. Traders may consider short or inverse gold ETF options to hedge against a potential turn.
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“While that bodes well for metals and mining stocks, (Allianz) does warn that the current rate hike cycle is different given the unconventional policies like quantitative easing that the Fed has employed (not to mention past performance is not a reliable indicator of future results and all that),” adds Mining.com.
For more information on the miners sector, visit our metals & mining category.