A leveraged way to play gold prices
On March 16, 2017, the performance of the VanEck Vectors Gold Miners ETF (GDX) significantly diverged from the SPDR Gold Shares ETF (GLD) on a YTD (year-to-date) basis. However, that’s not an isolated phenomenon.
When gold prices fell 11.0% in 2015, GDX amplified the loss by falling 25%. The direction was different in 2016, with GDX positively amplifying gold’s gains by rising 48% against gold’s rise of 8%.
As we saw in the previous part of this series, the Fed expects two more interest rate hikes in 2017. That could be negative for gold prices, and the leverage could again work on the downside for miners.
Precious metal miners
Based on the unique characteristics of precious metal miners, we’ll categorize them into the following groups:
- senior gold miners
- intermediate gold miners
- royalty and streaming companies
- silver miners
- South African gold miners
There are certain overlaps in these categorizations. For example, some South African companies could fit into the senior or intermediate space, and some silver miners could be either senior or intermediate miners. These categories are broadly based on the unique factors that drive them.
Looking at the miners
In this series, we’ll analyze the stocks in each category of miners that could outperform, given a higher interest rate scenario going into 2017.
As the chart above shows, Barrick Gold (ABX), Sibanye Gold (SBGL), Goldcorp (GG), and Pan American Silver (PAAS) have risen the most year-to-date. We’ll assess the reasons for these performances, which could help identify these miners’ likely courses of action as the price of gold comes under pressure following the Fed’s rate hike.
This assessment could also give us a better understanding of what to expect from gold prices and which miners could underperform or outperform the Gold Miners Index going forward.