By Brenton Garen and Tom Lydon
An obvious though still impressive beneficiary of gold's resurgence this year is the gold mining industry and its corresponding exchange traded funds. That includes the Market Vectors Gold Miners ETF (NYSEARCA:GDX), the largest and most heavily traded gold miner ETF.
GDX is up 50% year-to-date. Not only is that good for one of the best performances among non-leveraged ETFs, but it also puts GDX up nearly three times as much as ETFs that hold physical gold. That does not mean GDX and rival gold miner ETFs are perfect investments, not when the industry still faces headwinds.
Strategists point out that costs keep rising, which has narrowed profit margins among gold miners. Recent mine closures have not improved margins. Current mining operations are also facing deteriorating ore grades. The recent decline in energy prices and depreciating currencies where local miners operate has also had a minimal beneficial impact on cash costs.
Gold is seeing greater support from safe-haven demand after currency devaluations across Asia added to investment demand for a better store of value than paper currencies or stocks and bonds.
Gold assets look more attractive in a low interest rate environment as the precious metal is more competitive against assets that pay low interest, like bonds. Additionally, if the Fed holds off on further rate hikes, it would suggest the economy is not as strong, which would also help gold attract safe-haven demand.
"I believe this could be due to the fact that the cash cost of mining the yellow metal has not only been constantly below the gold price, but also falling. For miners, any increase in the price of gold can push the income as well as profit margins even higher," according to a Seeking Alpha analysis of GDX.
Supporting miners and GDX is the dollar, which has quickly weakened. The greenback is being weighed down on speculation that ongoing uncertainty may force the Federal Reserve to refrain from hiking interest rates in the near future. Consequently, a weaker USD makes alternative assets like metals more attractive.
Market Vectors Gold Miners ETF
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.