With gold futures residing at the highest levels in six years, gold miners and the related exchange traded funds are benefiting. For example, the VanEck Gold Miners ETF (NYSEArca: GDX) is higher by nearly 13% just this month, bringing its year-to-date gain to about 36%.
The precious metals mining industry has also been on the road to improved efficiency as they cut costs, increase production and raise more money. Supporting the bullish thesis for ETFs such as GDX is that many gold miners are finding ways to boost output while keeping a lid on costs.
“VanEck Vectors Gold Miners ETF’s call and put options open interest, a tally of outstanding contracts, is hovering near an all-time high reached on Thursday after the metal climbed,” reports Bloomberg. “The fund that trades under the ticker GDX climbed 36% this year, more than double the pace of gain for the precious metal.”
GDX 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 long-term average and rising M&A are all supportive of the miners space as well, but those fundamentals could be glossed over if the dollar strengthens.
Rate Cut Help for Gold
The recent interest rate cut by the Federal Reserve also provided a boost to gold, one that could have some legs if the dollar loses strength. Due to the fact that Fed cut rates by 25 basis points, it is possible the central bank lowers borrowing costs again later this, potentially providing another positive catalyst for gold and gold miners along the way.
Gold is believed by many investors to be inversely correlated with interest rates. Rising interest rates make bonds and other fixed-income investments more attractive, so money will flow into higher-yielding investments, such as bonds and money market funds, and out of gold, which offers no yield at all during times of higher interest rates, and back into gold ETFs.
“Bullion climbed 15% this year amid mounting speculation that the Federal Reserve will keep cutting interest rates to support the U.S. economy as the deepening trade war clouds the global growth outlook,” according to Bloomberg.
GDX hit a new 52-week high on Wednesday.
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