Low interest rates, a weak dollar, and the specter of inflation are among the factors boosting gold prices this year. That’s great news for exchange traded funds like 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 Sprott.
Mining strategies such as SGDM are particularly relevant when gold prices are rising, because miners can actually overshoot gold’s upside.
“When gold prices go up 1%, gold company stock can rise 3% to 5%. An 11% increase in gold prices can translate into 30% more cash flow for the companies that produce the gold, according to Imaru Casanova, deputy portfolio manager for VanEck investment management company,” reports Mining.com.
The SGDM Methodology
Gold has also found greater support from safe-haven demand and a more dovish outlook from major global central banks, notably the Federal Reserve’s shift toward potential interest rate cuts to combat slowing growth. Miners are proving adept at managing costs.
SGDM follows mid- to large-cap gold miners, but the underlying index weights 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 lower long-term debt to equity ratio, which have a greater ability to weather potential downturns.
“Many gold mining companies have become much more disciplined, she said, controlling their debts and making less risky investments,” adds Mining.com. “Many are investing in lower-risk brownfield exploration and expansions, for example, as opposed to higher risk greenfield projects.”
If gold rises to $2,000 an ounce, SGDM components would see greater cash flow, propelling the fund higher in the process.
“While someone who buys gold today at $1,900 per ounce today stands to make a tidy profit, should gold indeed to $3,000 per ounce over the next few years, the profits could be even bigger if investors owned gold company stocks,” 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.
