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Gold Producers are Heavily Underperforming Actual Gold

gold-(1).jpg  

BY: HANS ALBRECHT, CIM®, FCSI, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS

March 20, 2018

In the five-month period between October 13, 2017, and March 14, 2018, the SPDR Gold Shares ETF (GLD) was up 1.67%. During the same period, the VanEck Vectors Gold Miners ETF (GDX) was down -8.20%.

Gold-producer performance has been clearly diverging from gold itself. Incredibly, this divergence has been increasing – despite the fact that GLD isn’t far from multi-year highs. Normally, we would see miners react positively with even more 'beta' to a move up in gold, but the opposite has been happening.

The strange thing is, this is happening in the face of better fundamentals for these companies – they’re leaner and more selective when it comes to new projects. They’ve drastically chopped debt and cash flow has improved. They’re selling gold at fairly high levels and have improving margins. Simply put, they are in much better financial shape at a time when gold is performing well. Any way you slice it, these are not just companies for the 'doom-and-gloom' crowd – these are real businesses that are doing well in many cases.  

As always, covered call pricing in miners generally improves as the stocks go up. Should we finally get a positive reaction? Adding some limited covered call coverage can make sense into rallies as a potential way to monetize a portion of those gains. Alternatively, if you’re considering making a move in gold on this week's U.S. Federal Open Market Committee (FOMC) meeting outcome, gold option premiums are presently looking fairly reasonable as compared to a few weeks ago. 

Gold could potentially react swiftly to any unexpected rate decision. Given that markets have become much more interest-rate-sensitive this year, GLD puts and calls potentially represent an interesting value from the long side here.

chart1.png

Source: Bloomberg, between October 13, 2017 and March 14, 2018.

Annualized Performance1

  1
Month
3
Months
6
Months
YTD 1
Year
3
Years
5
Years
Since
Inception
SPDR Gold Shares ETF (GLD) -0.98% 5.70% 0.27% 2.00% 9.44% 4.32% -3.94% 8.15%2
VanEck Vectors Gold Miners ETF (GDX) -5.36% -0.85% -9.87% -6.54% 2.02% 6.98% -9.57% -4.35%3

 

1As at February 28, 2018.
2Since inception on November 18, 2004.
3 Since inception on May 16, 2006.

Investment Objectives

GLD: Seeks to reflect the performance of the price of gold bullion, less the Trust's expenses. The Trust holds gold and is expected from time to time to issue Baskets in exchange for deposits of gold and to distribute gold in connection with redemptions of Baskets.

GDX: Seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index (GDMNTR), which is intended to track the overall performance of companies involved in the gold mining industry.

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