Amid debasement of a variety of foreign currencies and investors’ thirst for safe-haven assets, gold is one of this year’s best-performing assets — a theme that’s permeating the universe of bullion-related assets. Just look at the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX). The GDX ETF is one of the stars of equity-based exchange-traded funds and easily one of the best involving a commodity.
The GDX ETF — the largest fund offering exposure to precious metals miners — is higher by 19.1% year-to-date, as of May 8, compared to a 12.3% gain for the bullion-backed SPDR Gold Shares (NYSEARCA:GLD).
Investors shouldn’t take GDX’s upside to this point in 2020 for granted because, as history shows, the relationship between spot gold prices and miners’ equity prices isn’t always perfect. That is to say there are years when gold rises and GLD sharply outperforms GDX. Additionally, there have been years in which gold traded lower with GDX, substantially overshooting to the downside.
For multiple reasons, the relationship between the GDX ETF and the price of gold is proving different this year and that could bode well for more upside for the miners ETF.
The GDX ETF Can Continue Shining
One of the obvious catalysts for continual upside in GDX this year is investors’ enthusiasm for gold and the related ETFs. World Gold Council Head of Research Juan Carlos Artigas confirms this enthusiasm, stating the following:
“The strong investment demand for gold is not surprising as gold has repeatedly proven itself as an effective hedge during complex and challenging market conditions, including the global financial crisis and the current COVID-19 pandemic … Gold has outperformed most major asset classes and is up 11% year-to-date – we expect this trend to continue as investors navigate the ongoing market and social uncertainty and the impact of central bank intervention.”
Indeed, gold ETFs, such as the aforementioned GLD, are residing at record asset levels according to the World Gold Council’s research:
“Globally, gold-backed ETFs (gold ETFs) added 170 tonnes(t) – net inflows of US$9.3bn (+5.1%) – in April, boosting holdings to a new all-time high of 3,355t … Assets under management (AUM) also reached a new record high of US$184bn as gold in US dollars moved higher by 5.8%. Inflows have been strong and consistent in recent months, but not unprecedented.”
Interestingly, investors are missing out on this trend with the GDX ETF. The fund has $14.4 billion in assets under management after starting 2020 closer to $14.9 billion. Conversely, GLD has added $10 billion in new cash this year, a total surpassed by just two other ETFs.
Another fact highlighting the notion that investors are missing out with GDX this year is that gold miners’ balance sheets are increasingly sturdy and due to low energy costs, production expenses are decreasing.
In fact, according to Fitch Ratings, they “expect industry FCF to remain robust in 2020 after modest improvement in 2019, even without further rallies in the price of gold due to cost reduction efforts, increased efficiency and lower capital spending.” According to their research, this, in turn, “might be used to accelerate deleveraging if leverage metrics are outside of management’s stated targets or for M&A. Gold miners may also return more cash to shareholders.”
The Bottom Line on GDX
Another reason to consider the GDX ETF is gold’s recovery cycles. Remembering that bullion disappointed during the March equity meltdown cause by the novel coronavirus pandemic, the rally in gold, assuming it started April 1, is actually new.
History bodes well on that front because, as history suggests, the last five gold recovery cycles lasted an average of 26 months, perhaps implying the yellow metal is in the early stages of what could be a lengthy bull market.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.