GDX just went above its 200-day moving average, so while it’s a trend following play, Lydon said there are several other reasons why the largest gold miners ETF is an interesting investment right now.
Lydon first pointed to the angst seen in the market lately and the Fed’s continued battle against inflation. While gold has not served as a great inflation hedge in the recent economic environment, history has demonstrated that its best performance is a little later in the economic cycle.
“Gold has not done a great job as far as inflation is concerned, we have seen so many other areas in the commodity space that have outperformed gold. It’s been really one of the worst performers in the last couple of years,” Lydon said. “But surprisingly, when you go back and you look at periods of time when we’ve seen inflation, gold tends to be a second half player. There have been some pretty intelligent portfolio managers and experts on Wall Street to point this out.”
The Fed getting inflation down to 2% might be a tougher job than most people think, Lydon said. Economists suggest the U.S. could be in an inflationary period for three to four more years, whereby inflation is running around 3–5% and markets and the economy perform just fine.
Another reason Lydon is looking at GDX right now is the recent increase in the price of gold.
“Gold, for the first time in five years, just went above $2,000 again, so that’s a little bit of a surprise,” Lydon said. “The whole thing about gold being a second half player, guess what? We might just have gotten into the fifth inning here in this inflationary cycle. And if that’s the case, we’re going to continue to see gold move higher.”
Gold demand mostly comes from emerging markets, primarily people buying jewelry in emerging markets, according to Lydon. Challenged economies will not affect the demand for current as it’s available in finite quantities.
“With that in mind, gold miners, which are the core of what GDX is all about, are making some pretty good money now with gold back of above $2,000 an ounce,” Lydon said.
Lydon is interested in gold miners as opposed to spot gold. While physical gold prices could go up another 5%, miners are much more profitable from a percentage standpoint, especially once the price is above $2,000, Lydon said.
“This is just an opportunity because this is the biggest miner ETF out there, it’s been around the longest and off the recent low, it’s actually performing better than spot,” Lydon said.
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