With political uncertainty in the rearview mirror and amidst a seemingly daily deluge of upbeat news on the coronavirus vaccine front, gold and gold miners are retreating. For one, the VanEck Vectors Gold Miners (NYSEArca: GDX) is lower by almost 9% over the past month.
GDX seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE® Arca Gold Miners Index. The fund normally invests at least 80% of its total assets in common stocks and depositary receipts of companies involved in the gold mining industry. The index is a modified market-capitalization weighted index primarily comprised of publicly traded companies involved in the mining for gold and silver.
Investors shouldn’t be quick to dismiss GDX’s prospects, despite the recent bout of gold weakness.
“While the gold price is experiencing near-term weakness, gold companies are still enjoying ample free cash flow. Many companies increased dividend payouts with third quarter results,” according to VanEck research. “Scotiabank figures the senior and intermediate producers they cover now have an average yield of 2.0%, which, per Bloomberg data, surpasses the average yield of the S&P 500 of approximately 1.5%.”
Gold’s Prognosis: A Decent Outlook with More Uncertainty Ahead
Adding to the case for GDX is improving cash flow for many gold miners, which is the result of not only rising gold prices, but prudent balance sheet management.
“More companies are positioned to maintain dividends throughout the gold cycle. Newmont and Barrick (7.13% and 6.21%, respectively, of Fund net assets) are laying out new frameworks for distributing excess cash. Yamana (3.17%) has established a dividend reserve fund,” notes VanEck. “These efforts set the companies apart from gold, which pays no dividend, as well companies in other sectors with lesser yields.”
Gold certainly had its run during the uncertainty of the Covid-19 pandemic, but as more economies around the world look to return to normal, the precious metal could lose its luster for the rest of 2020. That, however, could pose a buying opportunity for investors looking for gold exposure.
“In the longer term, there are unknown side effects from the overall clinical, psychological, social and economic shocks of the pandemic. The legacy of COVID-19 could transform political attitudes, global supply chains, demand patterns, work habits, risk tolerance and business practices,” notes VanEck. “While the news of vaccines is welcomed by all, a return to normal is far from guaranteed. Many risks remain that we believe can drive gold to new highs.”
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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.