Eyeballing gold miners

Financial networks focus on gold itself.

But they miss the real story.

I’m talking about gold miners.

In fact, the VanEck Vectors Gold Miners ETF (GDX) landed second to the S&P 500 ETF (SPY) last week amongst advisors with more than $1 billion under management.

And there’s a good reason you should look into this sector.

Who are the miners?

Like most specialized sectors, gold miners are made up of a few key players.

The GDX ETFs top five holdings include:

  • Newmont Corp. – 15.3%
  • Barrick Gold Corp. – 12.08%
  • Franco-Nevada Corp. – 8.02%
  • Wheaton Precious Metals Corp. – 5.58%
  • Newcrest Mining Limited – 5.1%

Together, these 5 companies make up over 46% of the GDX holdings.

Miners come in two varieties: senior and junior.

Technically, senior isn’t one but we’ll go with it for now.

Senior miners are the big guys noted above.

Junior miners are smaller capitalization miners. You can find them in the GDXJ ETF.

Think of the GDX like the S&P 500 and the GDXJ as the Russell 2000.

Relationship to gold

Since the price of gold is a major component of their profit margins, miners often trade in tandem with gold prices.

In most cases, they will make larger percentage moves versus gold itself.

Here’s an example.

From the low in March 2020 to the high in August of that same year, the GDX rose 182.94%. The GDXJ rose 237.86%. Gold only rose 42.85%.

However, there is one major difference between the miners and gold.

Miners are still companies while gold is a commodity. When the stock market tanks, miners tend to get dragged along even if gold does not.

Playing the miners

Gold mining operations aren’t difficult to understand.

Their entire business is based on just a few factors:

  • Gold prices
  • Mining costs (energy prices)
  • Transport costs
  • Total output
  • Exploration costs

That’s pretty much it. They work a lot like any oil exploration company does.

So, when energy prices plummet, their cost to mine goes down.

If their mines start to run bare, exploration costs go up and total output declines.

However, asset managers like using ETFs because they’re simpler.

Sure, you might earn a better return doing the homework on a few individual companies. But it takes more time.

Gold’s outlook

Many economists expect the price of gold to continue higher as inflation takes hold.

In a nutshell, the amount of gold in the world is relatively finite compared to money supply.

So, when the Fed drops more dollars out there, you have to spend more of them to buy the same piece of gold.

For simplicity’s sake, just think of gold as a hedge against inflation. When inflation goes up, so does the price of gold (most of the time).

Our hot take

It’s particularly interesting to see search volume pick up when miners aren’t yet near their all-time highs. Given that shares of the GDX are just below the halfway point between the 52-week highs and lows, this could be an interesting spot to build a position.

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