Investors shouldn’t get flustered with recent lethargy in gold prices and miners assets such as the Sprott Gold Miners ETF (NYSEArca: SGDM). In fact, the Sprott exchange traded fund has tailwinds that could lead to an impressive rebound.
SGDM tracks the Solactive Gold Miners Custom Factors Index and “emphasizes gold companies with the highest revenue growth and free cash flow yield, and the lowest long-term debt to equity ratio,” according to the issuer.
Investment demand could portend a rebound for bullion, providing SGDM components with some upside in the back half of 2021.
“Investment demand was 40% higher last year, with the traditional small bars and coins gaining 3%, and gold-backed ETFs up 120%,” according to State Street research. “Net purchases by central banks were 60% lower year on year, but that comparison was skewed by the fact that purchases in 2019 were the highest in 50 years.”
SGDM: Still in Focus
Inflationary pressures can boost the case for SGDM. Historically, gold is one of the premier inflation-fighting assets. Inflation fears are further reflected by a sharp rise in benchmark Treasury yields, which may be partially attributed to expectations for greater inflation. Additionally, SGDM components are doing an admirable job of managing costs.
Gold may not even be all that expensive. Even after 2020’s rally, the spot gold price is still below historical all-time highs when adjusted for inflation, and the precious metal has historically outperformed during periods of high inflation. The price gains have been supported by strong growth in global investments that partially offset weakness elsewhere amid ongoing Covid-19 disruptions. Additionally, the lower demand for jewelry has shown signs of recovery, which may add another layer of demand ahead.
“Turning to the supply side, mine production emerged relatively unscathed even though the pandemic wreaked havoc on supply chains in many industries,” notes State Street. “Last year, gold mine production was down 4% and hit a five-year low. While there was some disruption from the virus, this drop also represented a continuation of a long-term secular trend of gradual declines in gold production.”
SGDM is showing signs of life. The ETF is up 4.23% over the past month.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.