The VanEck Gold Miners ETF (NYSEArca: GDX), the largest ETF dedicated to gold miners, is up 30.30% this year and one of the primary reasons for the fund’s stellar showing is a spate of consolidation in the precious metals mining space.
GDX is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. 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 miners look set to extend a deal spree after notching transactions worth a record $30.5 billion this year, according to data, the biggest M&A binge since bullion prices peaked nearly a decade ago,” reports Reuters. “Led by top producers Newmont Goldcorp Corp and Barrick Gold Corp, miners are bulking up to replace dwindling reserves and win back investors who in recent years shunned the sector because of disappointing returns.”
More Mergers Coming?
With gold reserves dwindling and prices expected to rally again next year, particularly if the Federal Reserve continues paring interest rates, more mergers and acquisitions could bolster GDX.
Gold is believed by many investors to be inversely correlated with interest rates. Rising interest rates make bonds and other fixed-income investments more attractive, so money will flow into higher-yielding investments, such as bonds and money market funds, and out of gold, which offers no yield at all during times of higher interest rates, and back into gold ETFs.
“This year has seen 348 deals worth more than $30.5 billion, including net debt, according to Refinitiv Eikon data,” reports Reuters. “That is up from $10.8 billion last year and surpasses a previous high of $25.7 billion set in 2010, the data show. Gold topped $1,900 per ounce in 2011 and currently trades around $1,484, after hitting a six-year high in September.”
The precious metals mining industry has also been on the road to improved efficiency as they cut costs, increase production and raise more money. Supporting the bullish thesis for ETFs such as GDX is that many gold miners are finding ways to boost output while keeping a lid on costs.
For more information on the precious metals market, visit our precious metals category.
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.