The VanEck Vectors Gold Miners (NYSEArca: GDX) and other gold miners ETFs tumbled Wednesday, but some market observers see the potential for the group to stage a rebound.
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 the long-term average and rising M&A are all supportive of the miner’s space as well, but those fundamentals could be glossed over if the dollar strengthens.
“The fiscal and monetary measures currently being taken rival those seen during the housing crisis of 2008/2009, a time when owning gold and miners was extremely lucrative,” according to Schaeffer’s Investment Research. “Higher government spending and stimulus generally equates to higher prices in metals, and conversely a lower U.S. Dollar. Should this trend continue, further quantitative easing and government stimulus should push prices in these sectors even higher.”
As the coronavirus outbreak continues to be the wild card in the markets, the safe haven of precious metals is in high demand, especially for exchange-traded funds (ETFs) that are backed by gold. ETFs have been stockpiling gold as more coronavirus news continues to invade the financial markets.
Still, it’s been a rocky ride for gold as investors sold off on the precious metal to offset losses in equities.
“Bullion, by itself, is risky, but it’s supposed to provide insurance against inflation and financial crises,” wrote William Baldwin in Forbes. “Investment advisors who advocate allocating 5% or 10% to the metal can come up with hypothetical gold-spiked portfolios that would have looked pretty good in past decades in the trade-off of return against volatility.”
There are some other reasons to consider GDX and rival funds, including plunging oil prices.
“The ‘cherry on top’ for currently owning miners is low oil and fuel prices. Mining companies have huge operating costs, with fuel being their biggest expense,” according to Schaeffer’s. “The current average price for a gallon of diesel is $2.25, a massive drop from the $2.90/gallon average seen just last May. This big drop in operating expenses, coupled with gold prices near multi-year highs, could really boost profitability margins for these companies moving forward.”
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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.