Gold miners exchange traded funds, such as the VanEck Vectors Gold Miners ETF (NYSEArca: GDX) and the VanEck Vectors Gold Miners ETF (NYSEArca: GDXJ), were among the best-performing non-leveraged ETFs through the first half of this year, but that trade has rapidly turned south in recent months.
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.
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.
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.
“Of further note, even after the muted ‘rally’ for these mining companies, valuations remain at historic lows – especially with respect to the junior miners. When we have a real rally for these mining companies, the gains in value in these share prices will totally dwarf any possible gains with our bullion holdings,” according to ETF Daily News.
SEE MORE: 31 Gold ETFs Investors Should Size Up
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.
Active traders can play a potential rebound in gold miners with leveraged ETFs such as the Direxion Daily Gold Miners Bull 3X Shares (NYSEArca: NUGT) and the Direxion Daily Junior Gold Miners Index Bull 3X Shares (NYSEArca: JNUG).
“Knowledgeable investors know they must shun the senior mining companies, for several reasons. At the top of the list is that it is impossible to make money holding these entities. They are among the biggest serial under-performers in the entire realm of equities,” notes ETF Daily News.
For more information on the gold bullion market, visit our gold category.
VanEck Vectors Gold Miners ETF (NYSEArca: GDXJ)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.