Gold miners exchange traded funds, such as the VanEck Vectors Gold Miners ETF (NYSEArca: GDX) and the VanEck Vectors Gold Miners ETF (NYSEArca: GDXJ), tumbled in August and to close last week as financial markets are left wondering if a Federal Reserve rate hike is imminent.
Gold ETFs, including miners funds, tumbled last Friday after the usually dovish Federal Reserve Bank of Boston President Eric Rosengren said that a “reasonable case can be made” for tightening interest rates to avoid an overheating economy, the Wall street Journal reports.
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Fed funds futures imply limited probability the central bank will raise rates later this month, leading some market observers to say that, at most, there will be just one rate hike this year. Even that happens, some bond traders believe the Fed will not raise rates again until late 2017.
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.
[related_stories]“Plus, there are many other bits of bullish technical evidence to be found. For example, the VanEck Vectors Junior Gold Miners ETF (GDXJ), which tracks smaller capitalization stocks in the sector, sports on-balance, or cumulative volume levels on par with its July and August price peaks,” reports Michael Kahn for Barron’s. “That suggests that all the money that flowed out during the August decline already flowed back in, even though prices remain depressed. Put another way, volume traded during the recovery was greater than volume during the decline telling us that bulls were more aggressive than bears. That’s demand.”
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.
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“The wild card remains the uncertainty over the timing of the Federal Reserve’s next rate hike. However, given that it seems inevitable and gold still trades near 52-week highs perhaps the market has already factored that in,” according to Barron’s.
For more information on the gold bullion market, visit our gold category.
VanEck Vectors Gold Miners ETF
