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.