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Will The Uptrend In Gold Mining ETFs Continue?

gold miner pickThanks to the global worries over militant attacks in Iraq, bleak U.S. growth data in the winter and the geopolitical tension between Ukraine and Russia, gold bullion has climbed more than 9% so far this year on its regained safe haven status.

20% rise was seen in net-long positions in the gold futures and options markets during the week ending July 1 and holdings in exchange-traded products rose at the best clip since 2012.

While these performances have been good, events have been even better in the gold mining ETF space. Products in this category generally trade as a leveraged play on the underlying commodities, so when gold prices are rising, these mining ETFs emerge as the true winners.

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In fact, the gold miner ETFs outstripped the broad market funds like SPDR S&P 500 (SPY) by a wide margin in the same time frame. The biggest gold mining fund Market Vectors TR Gold Miners (GDX) – which suffered a loss of about 55% in 2013 due to the strength in the greenback – added over 23% this year while SPY gained about 7.9%. As a result, dirt cheap valuations have opened up buying opportunities in this space.

Now, the question is whether the momentum can be sustained through the balance of 2014.

Favorable Dynamics 

Jewelry Demand: The demand for gold jewelry, as well as bars and coins, has been strengthening this year mainly driven by China and India. Jewelry demand in the U.S. has been building up slowly with signs of economic recovery and lower prices.

Though the first quarter of 2014 witnessed a double-digit decline in gold demand in both the highest consuming nations, the situation will likely reverse soon as the year progresses especially given China is nearing stabilization.

Policy Easing in Europe: The surprise stimulus measure in Europe including introduction of a negative deposit rate to fight deflationary worries should help gold bullion. This in turn might boost the mining stocks (read: Gold Mining ETF Investing 101).

Cut in U.S. Growth Rate: Though in the U.S., the Fed has been steadily wrapping up its QE program (which will be now $35 billion a month from July), the Fed has vowed to keep interest rates low for longer as it trimmed the U.S. long-term growth forecast from 2.2–2.3% in March to 2.1–2.3% to reflect a frozen Q1. This should shore up gold prices ahead. Not only the U.S., a slash in the global growth forecast by the World Bank also sent gold prices northward.

Hedge against Inflation: Though a recent uptick in U.S. inflation went in favor of the price of greenback, this can be viewed as solid news for gold too as the metal is often observed as a hedging tool against inflation over the long term. Investors should note that consumer prices grew 2.1% year over year in May, the highest yearly expansion since October 2012.

Moderation in Production Hurdles: On the production front, there is also good news for gold miners for the long term. If the recent comments by Barrick Gold (ABX) and Newmont (NEM) are to be considered, there is an abundance of gold reserves in Nevada that have yet to be tapped. This should reduce miners’ cost structure as Nevada’s reserves carry reduced investment risk than the other politically disturbed mines across the globe, per the source.   

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