Among the many reasons to embrace gold and assets like the Sprott Gold Miners ETF (NYSEArca: SGDM) is rising inflation – a scenario investors are contending with today.
SGDM tracks the Solactive Gold Miners Custom Factors Index and “emphasizes gold companies with the highest revenue growth and free cash flow yield, and the lowest long-term debt to equity ratio,” according to the issuer.
Historically, gold is one of the premier inflation-fighting assets. Inflation fears are further reflected by a sharp rise in benchmark Treasury yields, which may be partially attributed to expectations for greater inflation.
“Global manufacturing activity is expanding at the fastest rate in more than a decade, creating robust demand for industrial metals this year,” according to State Street research. “Although Chinese demand may grow slower than last year, given the government’s lower-than-expected growth and fiscal deficit targets for this year, strong demand driven by manufacturing recovery outside of China and the potential multi-year infrastructure plan in the US may support the industrial metal market further in the coming years.”
SGDM: A Better Inflation-Fighting Tool?
SGDM follows mid- to large-cap gold miners, but the underlying index weighs components based on quarterly revenue growth on a year-over-year basis and the quality of balance sheets as measured by long-term debt to equity. By focusing on balance sheet strength, the fund has greater exposure to companies with a lower long-term debt to equity ratio, which have a greater ability to weather downturns.
At a time when so many investors are considering Treasury inflation protection securities (TIPS), SGDM offers more upside appreciation potential with plenty of protection against rising consumer prices. Plus, there’s earnings growth to be had too.
“Given strong demand and metal prices, metal producers and miners are expected to post earnings growth of 242% in 2021, up from 133% at the beginning of Q1 earnings season. Their growth estimate ranks highest among all GICS industries in the S&P Composite 1500 Index universe, exceeding the broad market by more than 200%,” notes State Street.
“Furthermore, the (mining) industry has historically outperformed the broader market when inflation expectations moved higher,” adds State Street.
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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.
