Gold is enjoying a solid though not spectacular performance in 2023. And that’s matriculated to bullion-backed exchange traded funds, the largest of which is higher by 5.8% year-to-date.
However, the same cannot be said of gold miners and the related ETFs as both the VanEck Gold Miners ETF (GDX ) and the VanEck Junior Gold Miners ETF (GDXJ ) are saddled with 2023 losses. Plenty of commodities market observers are forecasting an upside for the yellow metal in 2024 and 2025. GDX and GDXJ could be credible rebound candidates.
That credibility is enhanced by the fact that many miners, particularly the larger names that dot the GDX roster, are sporting sturdy balance sheets. Investors should not overlook that trait. If anything, it should be a source of allure. In a bygone era of investing in gold producers, these companies were profligate spenders, overpaying for acquisitions and saddling balance sheets with too much debt. Fortunately, those days are long gone and GDX member firms are prioritizing fiscal health and credit ratings.
Speaking of Credit Ratings…
The improving balance sheet of miners, including GDX member firms, could position some of these companies for credit upgrades. That brings the benefit of reduced financing costs.
“Global gold producers’ 2023 sector credit outlook is stable, supported by healthy balance sheets and deleveraging capacity,” noted Fitch Ratings. “Gold producer financial metrics remain strong for respective ratings partially driven by a period of high gold prices beginning in 2020. Which drove higher shareholder returns and investment as well as stronger financial flexibility.”
A case can be made that this year, the primary stumbling block encountered by GDX and GDXJ is that real interest rates are capping gold’s gains. Specific to GDXJ, small-cap stocks, regardless of industry, are out of favor, but they’re also historically inexpensive.
In other words, should the Federal Reserve signal it’s done raising rates and if Treasury yields respond to the downside in 2024, gold could trend higher. And potentially dragging GDX and GDXJ along for the ride. Bottom line: Those factors and strong balance sheets could support rebounds for shares of gold miners in 2024.
“Fitch sees gold prices moderating but remaining elevated in 2024 and 2025 relative to our mid-cycle assumption of $1,500/ounce. Margins will be pressured given elevated costs despite cost-cutting/productivity programs but should be relatively strong for respective ratings,” concluded Fitch.
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