- The VanEck Vectors Gold Miners ETF offers exposure to the world's leading gold miners and is cheap from a historical perspective based on current gold prices.
- While short-term interest rates are likely to continue rising as the Fed remains focused on high inflation, the bond market is increasingly pricing in subsequent interest rate cuts.
- 10-year inflation-linked bond yields have fallen by almost a full percentage point since their peak in mid-June, which is positive for gold prices.
- If gold prices recover, there is every chance that the GDX will not only rise but outperform gold itself as has been the case historically.
Panic selling in the sector has left gold mining stocks cheap once again, and the Fed's dovish pivot provides the green light for adding to positions. The VanEck Vectors Gold Miners ETF offers exposure to the world's leading gold miners and is cheap from a historical perspective based on current gold prices. Furthermore, the outlook for gold itself has improved markedly over the past few weeks as real bond yields have plunged. I continue to expect real yields to head back into negative territory, which should see gold resume its bull market and the GDX enter a period of outperformance.
The GDX ETF
The VanEck Vectors Gold Miners ETF is the oldest, largest, and most liquid gold mining ETF which tracks the performance of the NYSE Arca Gold Mining Index. The underlying index has a market capitalization of over USD241bn, having fallen from a peak of USD395bn in mid-2020. Despite the recent crash in Newmont's share price (NYSE: NEM ), it remains the largest company on the index with a weighting of 13%, closely followed by Barrick Gold ( GOLD ). The GDX is more diversified than the iShares MSCI Global Gold Miners ETF ( RING ) where these two stocks comprise 19% and 14% respectively. This comes at the expense of a slightly higher expense ratio of 0.52% versus RING's 0.39% and a lower dividend yield of 2.0% vs 2.8%. That said, we should see the GDX's dividend continue to rise in line with the underlying NYSE Arca Gold Mining Index, which has risen back to multi-year highs of 2.7%. The chart pattern looks highly encouraging, with the downtrend from the April high giving way last week after a brutal 41% decline in just over three months, suggesting potential for at least a relief rally.
We Are Past The Peak Of The Tightening Cycle
While short-term interest rates are likely to continue rising as the Fed remains focused on high inflation, the bond market is increasingly pricing in subsequent interest rate cuts. Furthermore, inflation expectations as measured by the bond market have begun to recover following their recent decline on the back of falling commodity prices. As a result, 10-year inflation-linked bond yields have fallen by almost a full percentage point since their peak in mid-June.
This is a significant development for gold, which competes with cash and bonds in investors' portfolios. When real bond yields fall, the opportunity cost of holding gold declines. I continue to believe that 10-year real bond yields will head back into negative territory over the coming months and years as weak economic outlook and high debt levels force the Fed to prioritize growth over inflation, which should see gold resume its bull market.
GDX Has A Proven Track Record Of Outperforming In Gold Bull Markets
If gold prices do indeed recover, there is every chance that the GDX will not only rise but outperform gold itself as has been the case historically. Despite the GDX's significant long-term underperformance relative to gold prices, this has entirely occurred during periods of declining gold prices. Since the GDX's inception in 2006, every period of rising gold prices has resulted in GDX outperformance. This makes perfect sense as a 1% rise in gold prices tends to result in a much more significant increase in gold miners' profitability.
Even if gold prices remain at current levels, the GDX looks attractive from a valuation perspective, both relative to its own history and relative to the S&P500. The table below shows the NYSE Arca Gold Miners Index valuation discount relative to its long-term median going back to 2006 and relative to the S&P500.
Price/Earnings | EV/EBITDA | Price/Sales | Price/Book Value | Dividend Yield, % | |
Gold Miners | 15.3 | 7.0 | 2.4 | 1.4 | 2.7 |
% Discount to S&P500 | -25 | -49 | -5 | -67 | -41 |
% Discount to Long-Term Average | -59 | -52 | -32 | -27 | -63 |
While 15.3x PE is not exactly bargain-basement levels, it is close to a record low for the index, and a recovery in gold prices could see earnings surge. It is also worth noting that improvements to balance sheets have helped improve the quality of such earnings, freeing up cash flow to be returned to shareholders. The GDX's underlying index now pays a respectable 2.7% dividend yield, which should gradually feed through into GDX payouts over the coming months.
Summary
The brutal selloff in the GDX looks to have ended as the Fed adopts a less hawkish stance amid the weakening economy. Real bond yields now suggest that gold prices are set to recover, and if history is any guide gold mining companies should outperform.
For further details see:
GDX: The Fed Has Blinked And Gold Miners Will Benefit