Gold miners exchange traded funds, such as the VanEck Vectors Gold Miners ETF (NYSEArca: GDX) and the VanEck Vectors Gold Miners ETF (NYSEArca: GDXJ), set a torrid pace through the first half of this year, but those ETFs and their rivals have recently endured significant drubbings.
That is not preventing some market observers from predicting that gold miners stocks can rally again.
Precious metals have been under pressure over the past several weeks as hints of an improving economy and a number of hawkish statements from Fed officials raised the prospect of a tightening monetary policy. Fed funds futures imply a rising probability that the Federal Reserve will boost interest rates in December.
SEE MORE: Gold Miners ETFs Confirm Strength Against Broad Market
Stock fundamentals like cost deflation across the mining industry, share valuations below long-term average and rising M&A are all supportive of the miners space as well, but those fundamentals could be glossed over if the dollar strengthens.
The Federal Reserve is seen as the primary culprit behind the recent struggles faced by gold and the related mining ETFs. The Fed meets later this week and some traders are still wagering that the U.S. central bank could unveil its first interest rate hike of 2016.
GDX’s downward move “has come as gold took a major leg lower, pushed down by a serious rise in bond yields and in the U.S. dollar. These moves, in turn, have come as expectations for a 2016 Federal Reserve hike have risen,” reports CNBC.
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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.
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.
“Gold, and the companies that dig it out of the ground, are highly exposed to Fed policy. Fed rate rises mean higher long-term yields and a stronger dollar, both of which hurt gold, a commodity that yields nothing and is denominated in dollars. In fact, strategist Larry McDonald goes so far as to say that trading gold miners is akin to ‘literally trading Fed policy,’ reports CNBC.
For more information on the gold bullion market, visit our gold category.