Selling pressure in the bond market, leading to rising U.S. government bond yields, is plaguing gold and miners equities, but investors shouldn’t be hasty in dismissing 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.
The recent dip in gold prices and miners could ultimately prove to be a buying opportunity because global central banks have set the stage for more upside for bullion prices.
“But of course it’s not all about bonds. The dollar has been on a rampage with the USDX at the highest for nearly a year. Late last year you would have struggled to find a dollar bull and so universal was the dislike that the short dollar trade was arguably the most crowded. As a contrarian it worried me then… and it has come to pass,” writes Metals Daily CEO Ross Norman.
The Outlook Is Still Bright for Bullion, ‘SGDM’
SGDM is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. Stock fundamentals like cost deflation across the mining industry, share valuations below the long-term average, and rising M&A are all supportive of the miners space as well.
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 investment 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.
Looking ahead, we can expect the Federal Reserve’s monetary policy to affect ongoing gold demand. Real interest rates have historically created an accommodative environment for gold bullion. Gold returns during periods of negative real rates have been double their historic average.
“The market has inflicted the largest amount of damage on the greatest number of participants and the short covering rally in the dollar has piled pain on top of misery for gold bugs. Again … for fundamental reasons, the wrong outcome,” adds Norman. “So where does that leave us … ? Well firstly at current levels gold looks to be an absolute steal. If you didn’t get the memo about the beginning of a new gold bull run in Q3 2018 then this is your last call.”
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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.