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

Bhopal fugitive Warren Anderson is dead (Roundup, Changing dateline)
Washington, Oct 31 (IANS) Warren Anderson, the former CEO of Union Carbide Corp, has died at 92 after living for 30 years under the shadow of the 1984 Bhopal gas tragedy that killed thousands.
 
 
Sit-ins delayed building powerhouses: Nawaz Sharif
Islamabad, Oct 31 (IANS) Prime Minister Nawaz Sharif Friday blamed sit-ins for delaying the construction of powerhouses in the country, as cricketer-turned-politician Imran Khan continued protesting with supporters in the capital city for over two months.
 
 
Britain to repay part of First World War debt
London, Oct 31 (IANS) British Chancellor of the Exchequer George Osborne Friday announced that the British government will pay off part of the country's First World War debt as part of the redemption of bonds stretching as far back as the 18th century.
 
 
UN-Habitat presents the first World Cities Day
Shanghai, Oct 31 (IANS/EFE) The UN Human Settlements Programme (UN-Habitat), headed by former Barcelona mayor Joan Clos, Friday launched its first World Cities Day in China, to be held every Oct 31 to promote sustainable development.
 
 
 

Latest from the Network

Arnold Schwarzenegger 'knew' he'd star in another Terminator movie
Arnold Schwarzenegger ''always knew'' he'd star in another 'Terminator' movie. The 67-year-old actor - the former governor of California - insists he wasn't surprised when he got a call from producers to appear in the...
Read more on Movie Balla
 
Anne Hathaway would 'love' a sequel to The Devil Wears Prada
Anne Hathaway would ''love'' to appear in a sequel to 'The Devil Wears Prada'. The Oscar-winning actress starred in the popular 2006 comedy-drama, which also featured Meryl Streep and Emily Blunt, and has revealed she...
Read more on Movie Balla
 
Lily Aldridge wearing mother's Playboy costume for Halloween
Lily Aldridge will wear her mother's old Playboy costume for Halloween. The 28-year-old model - who is married to Kings of Leon singer Caleb Followill - found her mum Laura Lyons' raunchy Playboy Bunny flight attendant...
Read more on Celebrity Balla
 
Rochelle Humes' daughter loves Marvin doll
Rochelle Humes is embarrassed by her daughter's obsession with a doll of her husband, Marvin Humes. The 25-year-old singer has admitted she found it ''cringey'' when she was recently photographed holding a doll of her...
Read more on Celebrity Balla
 
Keira Knightley annoyed Chloe Moretz didn't ask her advice
Keira Knightley was annoyed Chloe Grace Moretz didn't want her advice. The 29-year-old actress - who appears alongside the 17-year-old star in her latest movie 'Say When' - was disappointed that the young actress didn'...
Read more on Celebrity Balla
 
Daniel Radcliffe loses everything
Daniel Radcliffe loses everything. The 'Horns' star admits he constantly has to replace his mobile phone and often puts things away and can't ever find them again. The 25-year-old actor said: ''I lose things a lot. At...
Read more on Celebrity Balla
 
Apple Outsmarts Samsung in Terms of Revenue Generation
Samsung can sell more products, but it doesn’t mean that it will earn more profit, as Apple overtakes the Korean giant with respect to the earnings.According to the Cult of Mac, Samsung earned a profit of $3.8 billion...
Read more on Apple Balla
 
Apple Declares Not to Remove PCalc iOS Calculator Widget
The PCalc iOs calculator widget is free from the risk of being removed, as Apple decides not to drop it from the App Store.According to Tech Crunch, the officials of Apple have confirmed about the move, stating that it...
Read more on Apple Balla
 
Seth Rogen to Act as Steve Wozniak in the Steve Jobs’ Movie
Seth Rogen has got an important role in the biopic of the late Apple co-founder Steve Jobs, as he has been selected to play as Steve Wozniak.According to the Variety, Rogen will be advised directly by Steve Wozniak, the...
Read more on Apple Balla
 
Ponzy schemer cheats residents of $22 mn, gets 15-year jail
Washington, Oct 31 (IANS) If you have been one of those approached by some 'known' person for investing in something with an assurance of 'easy money', you may benefit reading about this Ponzi schemer jailed in the US...
Read more on Politics Balla