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GDX: Inflation sensation

Gold prices are climbing again, buoyed by a weaker US dollar and growing inflationary pressures. Market watchers forecast that the rally may sustain if consumer prices remain elevated and the Federal Reserve maintains its current mandate to allow inflation to rise.

VanEck
VanEck25 May 2021 1015 Views
GDX: Inflation sensation
  • Gold prices are climbing again, buoyed by a weaker US dollar and growing inflationary pressures. Market watchers forecast that the rally may sustain if consumer prices remain elevated and the Federal Reserve maintains its current mandate to allow inflation to rise.
  • Other concerns such as radical monetary policies, unsustainable debt levels and negative real rates also provide a conducive backdrop for gold prices.
  • Gold equities appear cheap compared to the gold price and other equities. They are well placed to benefit as they typically rise more than the gold price in an upswing.
  • And gold miners have been keeping their balance sheets in order, though they are not yet getting rewarded for it.
  • Investors can gain exposure to gold equities via VanEck Vectors Gold Miners ETF (NYSE: GDX), the world’s largest gold equities ETF with over US$14bn in assets under management.  There is also a GDX UCITS ETF.

Gold’s renewed rally

Gold has been inching higher in recent weeks, rising to US$1,860 per ounce in mid-May, up from a two-month trough in early March (Figure 1). A weaker dollar and falling real yields – on expectations of a pickup in inflation – helped fuel the gold rally.

Figure 1: Inching higher

Source: Factset, 19 May 2021.

Concerns over inflationary pressure intensified after the jump in US annual consumer price inflation in April (see Figure 2). The unexpected big jump in inflation data, coupled with a lacklustre employment report and muted retail sales, pose a dilemma for the Federal Reserve, which has been reluctant to tighten policy.

Figure 2: Inflation measures (annual % change)

* Personal consumption expenditure
Source: Refinitive, FT, May 2021

The US central bank has pledged to keep interest rates low for some time and maintained that any rise in inflation is expected to be short-lived. But it is unclear if Fed Chair Powell can continue to ignore transient inflationary pressures and remain focused on the spare capacity in the US economy. With breakeven inflation expectations near fresh highs, while real Treasury yields fall further into negative territory, gold is gaining traction from investors looking again to hedge against inflation.

Meanwhile, the patchy pace of global economic recovery caused by the pandemic should also provide a supportive environment for gold. The pandemic is far from over, with the emergence of new variants leading to new waves of infections across parts of Asia.


Compelling valuations

Gold mining companies are still trading at attractive valuations (see Figure 3) despite generating significant free cash flow; many are fundamentally sound and have robust balance sheets. Gold miners’ balance sheets are as strong as ever relative to other equity sectors. Most companies are holding their costs at/near US$1,000 an ounce, and are returning the cash to shareholders via increased dividends and share buybacks.

Figure 3: Compelling gold equity valuations

Source: Bloomberg, VanEck, 6 May 2021. GDX Index Inception is 29 September 2004. GDX Index is the NYSE Arca Gold Miners Index. You cannot invest directly in an index.


Gold stocks provide leverage to bullion

Gold equities tend to outperform gold bullion when the price rises, and underperform if the gold price falls. Although this expected relative performance may not hold during certain periods, gold equities have consistently demonstrated their effectiveness as leverage plays over the years. As investors become more confident that the current low multiples are not merely ‘value traps’, given their improved earnings and fundamentals, gold miners could benefit from an upward re-rating as capital flows towards value shares such as commodity-related stocks.


Key points of GDX:

  • With one trade on the NYSE, GDX gives investors instant access to 53 of the largest and most liquid global gold mining companies.
  • GDX on NYSE is the world’s largest gold miners ETF with more than S$14.36 bn in assets under management (as of 30 April 2021).
  • With over 50 years of experience managing gold equities, VanEck has the longest tenure among global asset managers in the gold sector.


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In this article

NYSE: GDX

VanEck Gold Miners ETF
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