Gold has been great investment this year, thanks to an equity market crash at the start of the year and the resultant safe-haven rally. The coronavirus outbreak has kept global markets edgy. Gold bullion ETF SPDR Gold Shares GLD has added about 28.4% this year against the 5.3% gains in the S&P 500 (as of Sep 15, 2020).
However, gold miners have delivered an even better performance as VanEck Vectors Gold Miners ETF GDX has jumped 46.1% this year. However, gold staged a decline in recent weeks as hopes of a coronavirus vaccine strengthened and risk-on sentiments and cyclical sector investing charged up.
In the past one month, GLD was up just 0.5%. But this could not dim the shine for gold mining investing as GDX was still hale and hearty and returned 6% in the past one-month period. This was in contrast to a 0.3% uptick in the S&P 500.
Should You Continue to Bet on Gold Mining Stocks & ETFs?
Gold mining stocks hail from a favorable Zacks industry (placed at the top 31% of total 250+ industries in the Zacks universe). There are some reasons for the future rally in the mining space.
The Fed has been acting super-dovish since March and will continue to remain so in the near future, which is always a plus for gold-related investments. Then there is the occasional uptick in investors’ sentiments. All credit goes to the rollout of gigantic Fed and government stimulus, hopes of vaccine rollouts and the OPEC output-cut deal.
Low oil prices are another plus. Mining companies’ 50% of production costs are closely linked to energy prices. As cheap as $40-oil despite the biggest output cut deal by the OPEC should work wonders for gold miners’ operating margins. Coronavirus-led demand disruptions have been weighing on oil prices.
Cheaper valuation and relatively low debt are other positives. Price/Book ratio for the gold mining industry stands at 1.69x versus 2.04x of the S&P 500. Debt/Equity ratio is also favorable for miners (0.02X) compared with the S&P 500 (0.70X).
Safe-Haven demand for gold will stay strong despite bear market rallies as several Wall Street analysts still believe the latest rally doesn’t have legs. Many analysts do not expect a full economic recovery before late 2021.
The ECB and the BoJ have benchmark interest rates in the negative territory. Right now, real U.S. treasury yields are negative from five-year to 30-year term and this lowers the opportunity cost of holding a non-interest-bearing asset like bullion.
Stocks & ETFs in Focus
Against this backdrop, we highlight a few gold mining ETFs and stocks that appear healthy bets.
Barrick Gold Corporation (GOLD)
Barrick Gold Corporation, based in Toronto, Canada, is the largest gold mining company in the world. The company has many advanced exploration and development projects located across five continents. The stock has a Zacks Rank #1 (Strong Buy).
AngloGold Ashanti Limited (AU)
AngloGold Ashanti Limited is an independent, global gold mining company with mines and exploration projects across Continental Africa, South Africa, Americas and Australasia. The stock has a Zacks Rank #1.
VanEck Vectors Gold Miners ETF GDX
The underlying NYSE Arca Gold Miners Index tracks the overall performance of companies involved in the gold mining industry. The fund charges 52 bps in fees.
VanEck Vectors Junior Gold Miners ETF GDXJ
The underlying MVIS Global Junior Gold Miners Index tracks the overall performance of the gold mining industry, which may include micro and small capitalization companies. It charges 53 bps in fees.
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