Gold-related investments are disappointing investors in 2018. A strong dollar coupled with three interest rate increases by the Federal Reserve are among the factors hampering the yellow metal.
As of Oct. 10, 2018, the largest exchange traded fund (ETF) backed by physical holdings of gold is down 8.94% on a year-to-date basis. That spells bad news for shares of gold miners and related funds. Gold miners can overshoot the losses of spot gold and physical gold funds and that is happening this year. The NYSE ARCA Gold Miners Index is lower by 20.87% as of Oct. 10, 2018.
Simply put, betting against bullion and gold miners in 2018 has been easy and rewarding. Thing is easy, crowded trades do not stay that way forever and data suggest the bearish gold trade is indeed crowded. Some fundamental factors, including inexpensive valuations and the potential for an uptick in industry consolidation, could form the foundation of a miners rebound.
Some analysts cite an array of sound fundamentals as reasons to consider gold miners exposure over the near-term.
“Although there is little evidence that inflation is accelerating (as of now) or that the end of this bull market is imminent, we argue that gold miners should be given a larger weight in investors’ portfolio for the following reasons: i) the economic cycle continues to mature; ii) asset valuation multiples are expanding and asset bubbles are emerging in certain areas; iii) budget deficits are increasing at alarming rates; and iv) quarterly earnings will face tougher comps in 2019, bringing into question how much longer this record-breaking bull market can continue,” said CFRA Research equity analyst Matthew Miller.1
Investors with a near-term view of miners may want to consider the heavy net short positioning in gold. For the week ending Sept. 25, 2018, professional traders’ net short position in gold futures was a record 83,677 contracts.
Source: CFTC, Bloomberg, ANZ Research, as of Sept. 25, 2018
History suggests extreme levels of bearish trades in gold can give way to substantial rallies in the yellow metal, potentially boosting miners along the way.
“After short positions spiked again in July 2005 and January 2016 (two times when the net long position was close to negative, or a net short position), gold prices surged 12% and 14%, respectively during the subsequent three-month periods,” said Miller.
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M&A Showing Signs Of Life
In an effort to tidy up balance sheets, gold miners mostly eschewed large scale mergers and acquisitions activity over the past several years, but that could be changing. In September, Barrick Gold Corp. (ABX) said it is acquiring rival Randgold Resources Ltd. (GOLD) for $6 billion.
Randgold is widely considered one of the industry’s most successful companies, delivering a shareholder return of 96% over the past decade, according to Mining.com.2 The deal is the fifth-largest ever in the gold mining space with the last of the top four occurring in 2010.
“We are starting to see a surge in M&A activity, which we think is a positive forward indicator for future performance of gold miners, as this magnifies the discount valuation in the space,” said Miller.
Source: S&P Global Market Intelligence, as of Sept. 30, 2018
With essentially all of the world’s easy-to-access gold already mined and industry valuations inexpensive relative to long-term averages, consolidation could continue rising. The NYSE ARCA Gold Miners Index had a price-to-earnings ratio (P/E ratio) of 22.11x at the end of the third quarter compared to its three-year average of 31.93x.
The Sprott Zacks Gold Miners Index (ZAXSGDM) sports an even deeper discount relative to its three-year average. As of Sept. 30, the Sprott Zacks Gold Miners Index’s P/E ratio is 21.96x, well below the three-year average of 41.91x. Based on price-to-book, price-to-cash-flow and price-to-sales, the Sprott Zacks Gold Miners Index trades at notable discounts to its three-year averages.
The Sprott Gold Miners ETF (SGDM) tracks the Sprott Zacks Gold Miners Index, a benchmark that employs a rules-based methodology to identify 25 large-cap gold miners with the highest beta to action in spot gold prices.
1 Source: CFRA Research https://newpublic.cfraresearch.com/
2 Source: Mining.com Oct. 8, 2018 http://www.mining.com/barrick-randgold-deal-breathes-new-life-gold/
Important Disclosure & Definitions
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.759.5679 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
Standardized performance for the Sprott Gold Miners ETF (SGDM) can be found here. Current holdings for DTEC can be found here.
Sprott Gold Miners ETF shares are not individually Redeemable. Investors buy and sell shares of the funds on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.
Price/Earnings Ratio – A valuation ratio of a company’s current share price compared to its per-share earnings.
Sprott Zacks Gold Miners Total Return Index is comprised of approximately 25 stocks selected, based on investment and other criteria, from a universe of gold and silver mining companies whose stock is listed on a major U.S. exchange. The stocks are selected using a proprietary, quantitative rules based methodology developed by Zacks Index Services.
NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. MVIS Global Junior Gold Miners (TR NET) (Ticker: MVGDXJTR) is the total return index that covers the most liquid small-cap companies which are active in the gold/silver mining sector.
One may not invest directly in an index
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of AAI. In addition, AAI assumes no responsibility to ensure the accuracy of the content written by the author.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
ALPS Portfolio Solutions Distributor, Inc. is the Distributor for The Sprott Gold Miners ETF.
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