Gold prices remain high by the standards of the past several years, prompting miners to boost output this year. That could be an assist for exchange traded funds such as the Sprott Gold Miners ETF (NYSEArca: SGDM).

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.

“After declining in 2019, global gold production was adversely affected by the covid-19 pandemic during 2020, while the suspension of expansion works and contractions from mines nearing closure also exacerbated the decline. Overall output in 2020 was estimated to have declined by 5.2% to 108 million ounces (moz), according to UK-based analytics company GlobalData,” reports Mining.com.

SGDM 1 Year Performance

Good to Golden with SGDM

Mining strategies such as SGDM are particularly relevant when gold prices are rising, because miners can actually overshoot gold’s upside. 

“This year, however, total production is expected to bounce back and increase by 5.5% to 113.9moz and then grow to 124.1moz by 2024 – a 2.9% compound annual growth rate (CAGR),” adds Mining.com. “Indonesia, Peru and the US will be the key contributors to this growth, GlobalData says. Combined production in these countries is expected to recover from an estimated 20.1moz in 2021 to 25.3moz in 2024.”

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 its balance sheet as measured by long-term debt to equity. As such, 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 potential downturns. 

New projects should drive output higher this year after the coronavirus pandemic crimped production in 2020.

“Key projects expected to commence operations during the forecast period include Barrick and Newmont’s Turquoise Ridge underground expansion project in Nevada, which is currently undergoing construction. With an annual gold production capacity of 500koz, the project is expected to be commissioned in late-2022,” concludes Mining.com.

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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.