With gold prices hitting a six-year high this week, it’s only natural that gold-focused exchange-traded funds have been on a tear as well. According to exchange-traded product data provider XTF.com, the top four performing funds during the past month (through June 21) all invest in gold miners.
Tops on the list is the iShares MSCI Global Gold Miners ETF (RING), with a return of 24.2 percent during the four-week period. This fund tracks a global index comprising 35 holdings in mostly four countries: Canada (49 percent of the index); the U.S. (20 percent); and South Africa and Australia (both more than 12 percent).
Close behind are the Sprott Gold Miners ETF (SGDM), Sprott Junior Gold Miners ETF (SGDJ) and VanEck Vectors Gold Miners ETF (GDX), with one-month returns ranging from nearly 23 percent to 21.7 percent.
All four ETFs have returned more than 21 percent year to date, with the iShares MSCI Global Gold Miners ETF and Sprott Gold Miners ETF leading the way with returns of 26.8 percent and 26 percent, respectively.
The returns on these four miner ETFs have skunked the year-to-date share price gains registered by ETPs linked to the price of gold itself. Specifically, the two largest gold products, the SPDR Gold Trust (GLD) and iShares Gold Trust (IAU), along with the up-and-coming GraniteShares Gold Trust (BAR), all are up north of 10 percent this year.
Why the disparity? Equally important, is the current gold rally sustainable?
Regarding the former, the miners are benefitting from more than just the run up in gold prices.
“Miners carry leverage to gold in terms of earnings leverage,” says Joseph Foster, a portfolio manager who oversees the gold investment team at VanEck. “Gold is up 10 percent, but the earnings of miners will be up a multiple of that. It cuts both ways on the upside and downside because the miners carry leverage to the metal.”
For gold investors, that means miners might be the place to be in the current environment.
“When looking at gold bullion versus gold equities, if you have a positive outlook on gold you’re better off in the equities because you’ll get that leverage and better performance from the equities,” Foster says.
Golden Days
The spot price for gold is above $1,400 per ounce for the first time since 2013, fueled by rising expectations for lower interest rates and a weaker dollar. Other factors supporting gold prices include the flight to safety caused by uncertainty around growth and trade risks, coupled with increased gold buying by central banks seeking to diversify their reserves.
Gold fever is spreading, but some analysts question whether investors have become too enamored of the yellow metal.
Based on the relative strength index used by technical analysts, gold currently is at the most overbought levels since 2011 and 2012 when the price of gold topped $1,800 and consistently traded above $1,700, says Mark Newton, technical market analyst at Newton Advisors LLC, a provider of technical market analysis for institutions and retail investors.
“The question is, does that mean ‘sell’?” he asks. “That’s not always the case, particularly for something that has been trading in a range for five to six years. Sometimes assets can run much higher than technical indicators would suggest.”
Newton is near-term cautious—but long-term bullish—on gold. His bullish stance is predicated on his belief that the economy is slowing and will eventually roll over in 2020.
“If the economy weakens more substantially, that will cause a big move up in gold because yields will be compressed and the dollar will weaken—those are bullish things for precious metals,” he says.
Foster from VanEck also is long-term bullish on gold.
“Gold has been forming a base for about six years where it has been range bound around the $1,200 mark,” he explains. “I can’t overstate the significance of this breakout because for momentum players and those who play the technical side of the markets this breakout is very significant.”
He’s also bullish from a fundamentals perspective. “I think we’re moving into a risk-off investing environment that will favor gold,” Foster says.
That said, gold investors need to be on guard against good economic news that could torpedo the gold rally. “The Fed is trying to engineer a soft landing,” Foster says. “If it’s successful, that wouldn’t be good for gold.”