Market Volatility Could Boost Gold Miners | ETF Trends

There’s nothing like some geopolitical volatility to lift gold, and the Russia-Ukraine conflict is doing just that. Over the past week, the largest exchange traded fund backed by physical holdings of the yellow metal is higher by 2.33%, sharply outperforming broad equity benchmarks along the way.

With gold’s resurgence in mind, it’s not surprising that some investors are also evaluating miners of the yellow metal and the related ETFs, including the WisdomTree Efficient Gold Plus Gold Miners Strategy Fund (GDMN).

One of the primary reasons why GDMN could be a valid near-term idea is that when spot gold prices rally, miners not only often participate in that upside, those stocks tend to overshoot it. That scenario has been playing out in recent weeks.

Another reason to consider GDMN today is that markets are rewarding quality stocks. At the very least, quality stocks aren’t faltering as much as the broader market, and unbeknownst to many investors, some large-cap miners, including some GDMN components, have quality traits indicating that they’ve come a long way from gold miners’ era of ill-fated acquisitions and bloated balance sheets.

“This trend began to reverse in 2018 as exploration activity rose, thereby supporting margins and providing gold miners with some flexibility to further increase exploration spending,” says WisdomTree Global Chief Investment Officer Jeremy Schwartz. “Yet the higher profitability witnessed among gold miners failed to lend a tailwind to gold miners’ performance. We believe this can be partly explained by the upward cost pressures faced by the industry, which contributed to negative price sentiment.”

Another point in GDMN’s favor is that it’s truly unique among gold miners ETFs in that it also features exposure to gold futures contracts. That’s an important, potentially useful trait for investors to consider because there are times when gold prices rally and miners don’t follow suit, leaving holders of individual stocks or dedicated miners ETFs disappointed.

Additionally, gold miners are proving adept at managing rising costs. In the face of those escalating costs, miners manage margins well, and the asset class is inexpensive to boot.

“Key valuation metrics such as price-to-book (P/B) at 1.23 for gold miners reveal they are trading at a 21% discount to the long-term average,” concludes Schwartz. “Gold miners’ profit margins remain healthy, and companies are generating significant free cash flow. The current free cash flow yield on the NYSE ARCA Gold Miners Index is 4.3%. In the current rising rate environment, dividend yields for gold miners have risen to 2.17% in January 2022 from 0.96% during the pandemic in 2020.”

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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.