Gold miners ETFs in play amid Trump uncertainty

Feb 15th, 2017 | By | Category: Commodities

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Gold mining stocks have experienced a strong start to the year, with ETFs tracking the sector posting returns of approximately 18% YTD, significantly outperforming the broader market. Whether this run can continue is the subject of debate. But if the fiscal stimulus and tax cuts proposed under the Trump administration play out, gold may continue to look like an increasingly attractive asset, further lending support to gold mining equities and the ETFs linked to them.

Gold miners ETFs have performed strongly thus far this year – as of 15 February 2017, the iShares Gold Producers UCITS ETF (LON: SPGP) has returned 18.4% YTD.

Evie Lamprou, Head of Distribution for Europe at China Post Global said: “Trump’s infrastructure plan could push up inflation, and under this scenario, gold would be in demand due to its inflation hedging properties.”

China Post Global is the asset manager behind the Market Access line-up of ETFs. Its Market Access NYSE Arca Gold Bugs Index UCITS ETF (Xetra: M9SD), trading in euros, has seen its NAV increase 17.9% YTD. The fund tracks the performance of the NYSE Arca Gold BUGS Index, a modified equally weighted index of companies involved in gold mining. The ETF has €93m in assets and a TER of 0.65%.

There also exists significant risks that Trump’s protectionist desires could stifle trade and growth. This scenario might also prove bullish for gold as the asset’s safe-haven status could come into play.

Joe Foster, Portfolio Manager and Gold Strategist at asset manager and ETF issuer VanEck said: “The Trump presidency has brought a new layer of uncertainty to the markets and the global geopolitical landscape. This, combined with existing risks of Brexit, possible political changes in Europe, Middle East strife and increasingly assertive actions by China and Russia make gold an attractive hedge against tail risks and uncertainties.”

Gold mining companies can be an attractive way to allocate assets to gold. “Gold mining companies are highly correlated with spot gold prices, but unlike physical gold they have the potential to pay dividends. They have also benefited, and continue to benefit, from low oil prices,” added Lamprou.

The bullish view on gold miners was echoed by Foster. “Gold miners carry attractive valuations and have done a tremendous job of cutting costs and improving their business. This should enable gold stocks to perform very well in a positive gold market.”

Gold mining companies have seen strong growth recently and there are currently several options to gain exposure to gold miners through ETFs listed in Europe. The iShares Gold Producers UCITS ETF (LON: SPGP) has returned 18.4% YTD with AUM of $451m, and a total expense ratio (TER) of 0.55%. The VanEck Vectors Gold Miners UCITS ETF (LON: GDX) has returned 13.6% YTD and currently has AUM of $122m with a TER of 0.53%. The ETFS DAXglobal Gold Mining GO UCITS ETF (LON: AUCP) has returned 16.8% YTD and has AUM of $80m and a TER of 0.65%. (All performance data is based on the ETFs’ net asset values)

It’s also possible to gain equity exposure to smaller gold miners who are typically in the development and exploration stage and therefore likely to be riskier than more established firms with existing reserves already in the extraction phase. VanEck offers the VanEck Vectors Junior Gold Miners UCITS ETF (LON: GDXJ) focused on small cap miners, which has returned 17.9% YTD with AUM of $65.4m and a TER of 0.55%.

Yet it is by no means a uniformly positive outlook for gold. There are signs that the recent period of loose monetary policy has come to an end, as inflation has picked up and central banks look ready to act to tighten the monetary system. At present, central banks have broadly indicated that they would be happy to see inflation rise above target in the short-term to avoid the risk of negative shocks to growth from premature rate hikes. Even so, most analysts are pricing in several rate rises from the FOMC this year which would likely have a negative impact on the price of gold as other yield-bearing assets look more attractive.

US rate hikes would also put upward pressure on the dollar which could also prove a headwind for gold prices as gold is negatively correlated to the dollar index because a strong dollar makes gold more expense to buyers outside the US.

Either way, the uncertainty surrounding US policy and the potential for global reflation mark out gold and gold miners as ones to watch.

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