As Gold Reaches Fresh Highs, Consider Gold Miners

The price of gold continues to rally on market anticipation of Fed interest rate cuts in the latter half of the year. Given the potentially constructive outlook for the yellow metal in the second half, gold bugs don’t want to miss the opportunity in gold miners this year.

April gold contracts settled for a record high Friday before setting a new record yesterday at $2,126.30 an ounce. The rally began on news of continued contraction by the manufacturing industry in February.

ISM data revealed PMI shrank faster than expected last month, from 49.1 in January to 47.8 in February. While a blow to economic strengthening, it’s a boon for potential Fed easing in the coming months.

Gold prices in the last year proved resilient in the face of a U.S. dollar growing ever stronger on rising rates. Geopolitics played a central role in much of the foundational support for gold in the last 18 months. The seizure of $300 billion in Russian foreign exchange reserves in response to its invasion of Ukraine in 2022 caused broader concern for global players.

The shift to the yellow metal from U.S. Treasury bonds by many central banks globally provided underlying stability, Peter Boockvar, CIO at Bleakley Financial Group, told CNBC.

“You can imagine the mentality of China, Saudi Arabia and other countries saying, ‘Do we really want to have all of our assets in U.S. Treasuries?’” Boockvar explained.

Now, with markets forecasting rate cuts in the second half, gold becomes even more enticing. Historically, as bond yields diminish on falling rates, gold prices rise as investors seek haven in the stability of gold.

Gold Miners Stand to Benefit From Rising Prices

The potential for continued gains in gold prices this year benefits not just direct investors but upstream companies such as gold miners. While miners have lagged spot exposures for much of the last year, constructive gold prices could prove beneficial this year for related equities.

Gold miners generate greater volatility than spot gold historically. Price movements are generally more pronounced, which carries the potential for larger drawdowns but also greater gains during rallies.

Since the beginning of the rally on February 28, the SPDR Gold Shares (GLD) gained 4.89% as of 03/05/24, according to Y-charts data. Meanwhile, the Sprott Gold Miners ETF (SDGM) soared 11.75% over the same period.

SDGM seeks to track the Solactive Gold Miners Custom Factors Index. The index provides exposure to U.S. and Canadian-listed gold companies of significant size. It seeks to target companies with high free cash flow yields, largest revenue growth, and those carrying low long-term debt to equity.

The current breakdown of cap size within the fund is 44.1% large-cap companies over $10 billion, 22.13% medium cap companies of $2 billion to $10 billion, and 33.77% companies with less than $2 billion, as of 01/31/24. SDGM carries an expense ratio of 0.50% with current fee waivers.

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