Physical gold ETFs retreated over the past week. That situation has been particularly onerous for gold mining equities and ETFs. That’s an asset class known for overshooting the yellow metal’s moves in both directions.
However, there could be a golden lining, pun intended. Gold’s recent pullback is arguably healthy. That’s because the commodity’s scorching run this year and the aforementioned retrenchment in mining stocks could open the door to opportunity with the WisdomTree Efficient Gold Plus Gold Miners Strategy Fund (GDMN ).
The actively managed GDMN is one of the most unique ETFs in the gold category. That’s because it provides exposure to both gold futures and mining stocks. That’s been a potent combination as highlighted by the ETF’s 155.56% year-to-date. But it’s one that cuts both ways as confirmed by an 8.20% dip over the past week. Fortunately, the case for a GDMN rebound isn’t rooted in “just because” or “it’s time.” Rather, a bullion bounceback could be facilitated by sound fundamentals.
Miners’ Prudence Could Lift Case for GDMN
As noted above, GDMN features a two-pronged approach — gold futures and mining stocks. Regarding the latter, the group has recently pulled back materially off its highs. But the fundamentals underpinning the industry remain solid.
“Higher prices are a boost for gold producers, which have increased their mine supply by only 0.3% per year on average since 2018,” noted Morgan Stanley. “Some producers are presenting feasibility studies for new projects, expanding the life of their existing mines or resuming operations at units previously considered uneconomical.”
Another reason gold miners could bounce back, fueling GDMN along the way, is because the industry learned lessons from past eras of high gold prices. That is to say this gold bull market may not be a catalyst for profligate spending. Rather, miners, including those residing in GDMN, are likely to be restrained while focusing on balance sheet strength and profitability. That’s positive for investors considering a highly capital-intensive industry and one with mixed success on the consolidation front.
Super-Cycle Unlikely
“Profitable mining customers will continue to drive the de-bottlenecking of projects and underpin capex growth out to the end of the decade,” said Michael Harleaux, who covers European capital goods at Morgan Stanley Research. “But a super-cycle in the form of a substantial greenfield uptick is unlikely, given the permitting and regulatory constraints.”
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