Why Lower Energy Prices Will Fuel Demand for Gold and Precious Metals

Includes: GDX, IGE, XME
by: Market Participant

Recently I have been looking at the SPDR Metals and Mining ETF (NYSEARCA:XME). This ETF represents an equal weighted index of stocks involved in metals and mining. The fund is mostly base-metal miners, together with a few steel makers, coal miners and gold miners.

This nifty chart shows the performance of XME over the past three months. XME has followed the path of iShares Goldman Sachs Natural Resource ETF (NYSEARCA:IGE) even though IGE has very little exposure to metals and mining. 60% of IGE is Oil Stocks and 18% Oil & Gas Services, with only a 13.41% weighting to base metals and mining. Market Vectors Gold Miners ETF (NYSEARCA:GDX) are only a small percent of XME, and so XME is not very sensitive to the price of gold and precious metals.

The main question about investing in XME is the relationship between energy prices and demand for metals. Fundamentally lower energy prices make it cheaper to refine metals while freeing up income to be spent on metal and metal objects. It seems that this point has been forgotten during the current natural resources relaxation. If core energy prices go down, mining and refining metals is more profitable.

The core arguments for a secular bull market in natural resources remain in place because the faster growing parts of the world [EEB/European Environmental Bureau] are slowly converting from export to consumption driven economies. Over time consumers throughout the developing world will demand more metal-intensive consumer goods (think of cars, refrigerators, air conditioners etc.). Natural resources have been a hot investment theme for the past few years, but not all natural resources are alike...

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