Despite High Prices, Gold Miners Aren't Playing it Fast and Loose

When a commodity’s prices are high, producers typically rush to boost output to capitalize on those elevated prices, but gold miners are apparently resisting that strategy and that could be good news for ETFs, such as the VanEck Vectors Gold Miners (NYSEArca: GDX).

GDX seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE® Arca Gold Miners Index®.

The fund normally invests at least 80% of its total assets in common stocks and depositary receipts of companies involved in the gold mining industry. The index is a modified market-capitalization weighted index primarily comprised of publicly traded companies involved in the mining for gold and silver.

“The world’s top gold miners are retrenching after covid-19 related shutdowns despite record prices for the yellow metal, with cost-conscious executives prioritizing investor returns over production growth,” reports Reuters. Gold prices have jumped 30% this year to roughly $2,000 an ounce as central banks dial-up stimulus measures in response to the coronavirus pandemic.

Being Prudent

In bygone eras of high gold prices, GDX components often rush to boost output with little regard for their balance sheets. That led to a multi-year malaise for the group, but with balance sheets in the industry now as strong as they’ve ever been, gold miners are liking the fact that investors will reward financial prudence.

It’s no secret that gold has been a major beneficiary during the coronavirus pandemic as a viable safe haven asset amid all the uncertainty in the capital markets. But investors don’t actually have to get pure-play gold exposure in order to reap the benefits of the precious metal—enter gold miners.

Gold certainly had its run during the uncertainty of the Covid-19 pandemic, but as more economies around the world look to return to normal, the precious metal could lose its luster for the rest of 2020. That, however, could pose a buying opportunity for investors looking for gold exposure.

“Seven out of 10 of the global gold miners, including Newmont, the world’s biggest gold miner, Canada’s Barrick and South Africa’s Gold Fields, have cut planned output for the year by 7%, citing coronavirus-related shutdowns, regulatory filings show,” according to Reuters. “The caution is a reversal from the 2011 gold price boom, which prompted buyers to overspend on acquisitions and led to billions in impairments when prices crashed in subsequent years.”

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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.