When gold prices falter, it’s easy for investors to get frustrated with mining equities, but they shouldn’t be hasty in doing so. The fundamentals for miners like the Sprott Gold Miners ETF (NYSEArca: SGDM) remain solid.
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.
Obviously, gold prices are what many investors look to first when evaluating an asset like SGDM. Pricing is undoubtedly important, but the Sprott fund has some other factors in its favor. Those include dividend growth potential.
“According to Bloomberg, dividend annual forecasts for Bloomberg Intelligence industry groups, gold miners are expected to more than double dividends this year, outpacing the 75% dividend hike of copper producers. Gold producers have done a solid job of rewarding shareholders with dividend hikes the past couple years, thanks to their ability to generate excess cash from higher gold prices,” reports Kitco News.
More to SGDM’s Story
Precious metals have had a tough time this year, as stocks have continued to rally. But with interest rates climbing recently, some analysts see more upside ahead.
The market is leery that all the additional stimulus will be inflationary. For the metals, inflation should be supportive, as should stimulus spending.
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.
“One opportunity thanks to lower bullion prices: stronger retail purchases. Benchmark gold futures in India are down 20% from a record in August last year, and imports rose 412% in February from a year earlier to the highest since November 2019,” according to Kitco. “India is the world’s second largest consumer of the precious metal and demand historically picks up ahead of holidays and celebrations.”
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 their 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 market downturns.
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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.
