Could Certain Commodities ETFs Yield a Potential Gold Mine For Investors

Feb 19 2014, 12:27pm CST | by

2013 marked the worst year for gold since 1981. It was the first negative year in 12 years, down -27%. This was mainly attributed to a lack of inflationary pressures and a booming developed equity market. Huge outflows were seen in gold funds and gold ETFs. The largest gold ETF, SPDR Gold Shares (GLD), lost over one third of its assets under management. Gold mining ETFs fared even worse, as Market Vectors Gold Miners ETF (GDX) fell over -54% in 2013, marking the third consecutive year of losses. Junior miners (GDXJ) were down over -60% in 2013.  With gold prices way down, is it finally time to buy back into precious metals?

Gold as a Hedge

Markets got off to a rough start in January and that spilled into early February with the VIX spiking. The 10 year treasury yield fell to almost 2.6%, despite a general consensus of continuing rising rates. Equities typically start the year off strong due to the “January Effect” – a period when most investors rebalance portfolios – yet the S&P 500 lost -3.5% in the first month of the year. The Market Vectors Gold Miners ETF (GDX) exhibits a correlation coefficient of just 0.19 to the S&P 500 and as markets corrected in January, GDX gained an impressive 11%. While markets have rebounded somewhat in February, heightened volatility still exists. Having a low correlation to the market is what you want in an environment that is prone to big market swings.

Global Gold

The rising rate outlook in the US has been deemed a headwind for gold markets. However, if real wages grow in line with rising rates, demand for gold could increase as well. A study conducted by WGC’s “Gold Investor” report showed that gold returned 60% from October 2003 to October 2006 as US real interest rates rose from -1% to 3%. On an international scale, US demand for gold only accounts for less than ¼ of total global aggregate demand.  While the US may be entering a phase of tighter monetary policy, the majority of notable world governments are still currently engaged in a period of increased spending, borrowing, and monetary printing, all of which present tailwinds for the global gold market.

Focus on the Mines

Gold mining stocks are some of the cheapest equities currently available to investors. The below figure shows that gold producing companies are currently trading much lower than their historical average P/NAV multiples. 2013’s major selloff in gold mining stocks brought a wider valuation gap between physical gold and gold mining share prices. Comparing the miner focused Philadelphia Gold and Silver Index to the spot price of gold shows a current ratio of about .075 (current index at 98, spot price at $1,300). In the past 30 years, the ratio was typically above 0.2, suggesting that the mining index is currently undervalued.

Mining stocks offer exposure to gold with reduced exposure to fluctuations in gold prices as a company’s structure can give it the ability to absorb price changes. Gold prices do not necessarily need to appreciate to drive returns in mining stocks, rather a stabilizing gold price can generate results through decreased fixed mining costs. Barrick Gold Corp (ABX) is GDX’s top holding with an allocation of over 13%. As gold prices corrected in 2013, companies like ABX shifted their business models to focus on cutting costs in order to drive profits. Barrick Gold took action in 2013 selling multiple mines in Western Australia as well as selling its energy arm, which brought in $3B in a share sale to help cut debt.

Takeaway

Gold, and more specifically gold mining stocks, were oversold in 2013. US inflationary pressures may not be as influential, yet outlook for the global gold market is positive through 2014. It is highly unlikely that equity markets will return remotely as much as last year, making diversification a strong theme for 2014. Buying into the gold mining sector right now is a very cheap way to hedge against upcoming market corrections while also adding strong real asset diversification to your portfolio.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Ultriva CEO Explains Lean Manufacturing Requires Supplier Replenishment
Cupertino, CA, April 20, 2014 --(PR.com)-- Often overlooked in lean manufacturing initiatives is the supply chain, in particular supplier replenishment. In the current company blog, Ultriva’s CEO, Narayan...
 
 
Brakes India Limited Selects VIMANA by System Insights to Increase Productivity and Reduce Costs
Brakes India Limited Selects VIMANA by System Insights to Increase Productivity and Reduce Costs
 
 
Jerry List to Present at QC Software Webinar: WCS Versus WMS Picking the Right Solution
Cincinnati, OH, April 20, 2014 --(PR.com)-- Tuesday, June 10th, Jerry List, VP of QC Software, will present a webinar titled, “Warehouse Control Systems (WCS) versus Warehouse Management Systems (WMS)…How...
 
 
TraceGains May 15th Webinar Provides Manufacturers Support with GFSI
Westminster, CO, April 20, 2014 --(PR.com)-- TraceGains is offering a highly requested webinar addressing the impetus for creating the Global Food Safety Initiative (GFSI), its benefits, and basic steps to support...
 
 
 

Latest from the Network

Ultriva CEO Explains Lean Manufacturing Requires Supplier Replenishment
Cupertino, CA, April 20, 2014 --(PR.com)-- Often overlooked in lean manufacturing initiatives is the supply chain, in particular supplier replenishment. In the current company blog, Ultriva&#8217;s CEO, Narayan...
Read more on Business Balla
 
Brakes India Limited Selects VIMANA by System Insights to Increase Productivity and Reduce Costs
Berkeley, CA, April 20, 2014 --(PR.com)-- System Insights is rapidly expanding its customer base across discrete and process manufacturing industries including companies in Aerospace, Automotive, Electronics,...
Read more on Business Balla
 
Jerry List to Present at QC Software Webinar: WCS Versus WMS Picking the Right Solution
Cincinnati, OH, April 20, 2014 --(PR.com)-- Tuesday, June 10th, Jerry List, VP of QC Software, will present a webinar titled, &#8220;Warehouse Control Systems (WCS) versus Warehouse Management Systems (WMS)&#8230;How...
Read more on Business Balla
 
TraceGains May 15th Webinar Provides Manufacturers Support with GFSI
Westminster, CO, April 20, 2014 --(PR.com)-- TraceGains is offering a highly requested webinar addressing the impetus for creating the Global Food Safety Initiative (GFSI), its benefits, and basic steps to support...
Read more on Business Balla
 
After Game One Win, Warriors Playoff Tickets Are Now Most Expensive In U.S.
With their dramatic game-one road win against the Clippers, the Warriors have the upper-hand in the battle for California basketball.  If they can advance, it will be the only the third time in the last twenty years...
Read more on Business Balla
 
Enterprises TV to Air Segment on Reducing Business Travel Costs
Coral Springs, FL, April 20, 2014 --(PR.com)-- The producers of Enterprises TV are pleased to announce they are working on a segment focusing on business travel costs and how some companies are reducing them. As...
Read more on TV Balla
 
3 Month BJJ White Belt Fundamentals Course with Master Marco Alvan
Springfield, MA, April 20, 2014 --(PR.com)-- Come and find out how to learn Brazilian Jiu Jitsu in a fun, relaxed environment. Team Link in Ludlow, Massachusetts will be holding 3 month BJJ course designed...
Read more on Sport Balla
 
Bcut Productions Presents "The Hilltop Barbershop" Movie Premiere
Springfield, NJ, April 20, 2014 --(PR.com)-- Bobby and his friends take you on a comical ride as the owner of Bobby&#39;s Cut above barbershop. The story takes you into the real world of the barbershop and the...
Read more on Movie Balla
 
Nous Infosystems and SmartBear Software Enter Strategic Partnership
Bangalore, India, April 20, 2014 --(PR.com)-- SmartBear Software, the leading provider of software quality and performance management tools, and Nous Infosystems, a global IT organization offering quality software...
Read more on Business Balla
 
EVO Payments International and PAY.ON Partner on Quick Interface for SME Merchants
Munich, Germany, April 20, 2014 --(PR.com)-- PAY.ON, the world&#39;s leading operator of web-based, omnichannel payment infrastructure systems, and EVO Payments International (EVO), a leading card payment acquirer and...
Read more on Business Balla
 
 
Auto Balla Sexy Balla Sport Balla TV Balla Politics Balla Movie Balla Apple Balla Business Balla Ad Balla Celebrity Balla