Should You Buy Gold Mining ETFs on the Dip?

Recent lethargy in gold might seem to be unappealing, but it could also spell opportunity for investors embracing high quality mining assets, such as those found in 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.

The fund’s focus on quality, one that traditional peers often lack, may help investors position for a rebound in mining equities.

“The gold market has struggled early in 2021 as bond yields have spiked to a one-year high. However, Rory Townsend, head of gold research at Wood Mackenzie, said in a telephone interview with Kitco News on the sidelines of the Prospectors & Developers Association of Canada (PDAC) virtual mining conference that he sees the rise in bond yields as a bit of a head fake and that gold prices should recover,” reports Kitco News.

Catalysts to Reignite Gold Miners, ‘SGDM’

Inflationary pressures can boost the case for SGDM. 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. Additionally, SGDM components are doing an admirable job of managing costs.

“However, regardless of what the gold market does this year, Townsend said that there is still plenty of value in the mining sector that should attract more investment capital,” according to Kitco. “He noted that even if prices fall to $1,600 an ounce, that still represents significant cash-flow growth for major producers. He added that average production costs in the mining sector are still around $960 an ounce.”

See also: How to Invest in Gold: Physical vs. Miners ETFs

Gold may not even be all that expensive. Even after 2020’s rally, the spot gold price is still below historical all-time highs when adjusted for inflation, and the precious metal has historically outperformed during periods of high inflation. The price gains have been supported by strong growth in global investments that partially offset weakness elsewhere amid ongoing Covid-19 disruptions. Additionally, the lower demand for jewelry has shown signs of recovery, which may add another layer of demand ahead.

“As to what companies should do with their increasing cash reserves, Townsend said that there is no one solution. He explained that companies with healthy pipeline production should look to give more money back to investors; however, companies with weak growth prospects will see better value putting the extra money in the ground, he said,” concludes Kitco.

SGDM 1 Year Performance

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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.