Gold Miners Rally Could be Legitimate
This article was originally published on ETFTrends.com.
Following spot gold prices higher Thursday, gold miners exchange traded funds soared. The VanEck Vectors Gold Miners ETF (NYSEArca: GDX ), the largest exchange traded fund dedicated to gold mining stocks, was among the leaders of that rally, climbing above its 20- and 50-day moving averages for the first time in months.
While gold miners remain among this year's most punished asset classes, a slew of fundamental factors support more upside for the group. Those factors include rock-bottom valuations and the potential for increased mergers and acquisitions activity following last month's news that Barrick Gold Corp. (ABX) will acquire Randgold Resources Ltd. (GOLD) .
Importantly, there is not a major premium involved in Barrick's $6 billion deal for Randgold, indicating acquisitive miners are serious about keeping balance sheets strong.
“Barrick-Randgold is the first major deal we know of in the gold sector without a premium,” according to VanEck. “This kept the arbs out of the market, and the results were impressive. In the week following the announcement, Randgold rose 10.4% and Barrick was up 5.8%, while the NYSE Arca Gold Miners Index was down 1.3%.”
Other Factors for Gold, Gold Miners
GDX is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. Stock fundamentals like cost deflation across the mining industry, share valuations below long-term average and rising M&A are all supportive of the miners space as well, but those fundamentals could be glossed over if the dollar strengthens.
“Although there is little evidence that inflation is accelerating (as of now) or that the end of this bull market is imminent, we argue that gold miners should be given a larger weight in investors’ portfolio for the following reasons: i) the economic cycle continues to mature; ii) asset valuation multiples are expanding and asset bubbles are emerging in certain areas; iii) budget deficits are increasing at alarming rates; and iv) quarterly earnings will face tougher comps in 2019, bringing into question how much longer this record-breaking bull market can continue,” said CFRA Research equity analyst Matthew Miller in a recent note.
While still below the go-go days of the 2006 through 2010 period, gold mining consolidation is rising this year, a theme that could continue as producers look to bolster reserves at a time when most easy to reach deposits have already been tapped.
For more information on the gold market, visit our gold category.
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