While gold miners have been out of favor for a long time, that might be about to change. Since the uncertainty in the market is increasing, gold prices are poised to rise. This rise should be followed by gold miners (GDX), which are essentially a leveraged play on gold prices. Moreover, gold miners as a group have emerged as much stronger, leaner, and more competitive after their mistimed deals at the peak of the cycle, leading to debt escalations and substantial write-offs. These factors should also support them fundamentally.
For more on their fundamental performance, see How Gold and Gold Miners Performed in 1Q18.
Leveraged to gold
While a surge in gold prices would benefit almost all gold stocks, some stocks have more leverage to gold prices than others. Kinross Gold (KGC) and Yamana Gold (AUY) have shown the most sensitivity to gold prices since the start of 2016. Among intermediate gold miners, Iamgold (IAG) and Coeur Mining (CDE) have higher sensitivity to gold prices. Goldcorp (GG), Newmont Mining (NEM), and Agnico Eagle Mines (AEM) have strong production pipelines, supporting higher growth going forward.
Investors who would like to have less volatile and more defensive exposure among precious metal equities, royalty, and streaming companies might fit the bill. These companies don’t own the mines themselves but get somewhat fixed income streams after making upfront payments for production rights to mines. Franco-Nevada (FNV) and Royal Gold (RGLD) are engaged in this type of business.
For more risk-tolerant investors, leveraged ETFs such as the ProShares Ultra Silver ETF (AGQ) and the Direxion Daily Gold Miners Bull 3X ETF (NUGT) provide high leverage to changes in precious metal prices. But while they might multiply gains in the event of an upside in gold prices, the downside is also higher if precious metal prices come under pressure.
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