The VanEck Vectors Gold Miners ETF (NYSEArca: GDX) and the VanEck Vectors Junior Gold Miners ETF (NYSEArca: GDXJ), the two largest gold miners exchange traded funds, showed some signs of life last week.
For example, GDX posted a weekly gain of just over 6% while GDXJ jumped 8%. GDXJ’s surge last week helped bring the ETF back to positive territory on a year-to-date basis.
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.
As ETF Trends noted last month, GDXJ’s underlying index is undergoing some significant changes after the ETF became one of the largest shareholders in several of it holdings.
“The mining sector saw its fundamentals hit rock bottom in 2014-2015 and became “bombed out” at the end of 2015. However, while parts of the industry have performed well, as a whole it has been unable to push higher after a torrid recovery in early 2016. A big reason is the outlook for metals prices suggests lower prices before any large advance. Until metals prices are ready to rise, the miners may find themselves in a bearish bull,” reports ETF Daily News.
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.
“The mining stocks have fallen below their 50 and 200-day moving averages and are even struggling around their 400-day moving averages (which provided support in December 2016) but this does not threaten the epic 2015-2016 bottom. There are a plethora of valuation metrics from January 2016 that are unlikely to be seen again. That time marked the worst 5 and 10-year rolling performance for gold stocks in 90 years,” according to ETF Daily News.
GDX is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. Nevertheless, gold assets may have further room to fall if the U.S. dollar and real bond yields continue to rise.
For more information on the gold market, visit our gold category.