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Time for Gold Mining ETFs?

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Gold has had a downbeat 2021 so far, thanks to an equity market rally and the lower demand for safe-havens on vaccine and Biden’s fiscal stimulus optimism. Strength in the greenback (up 2.2% this year) also weighed on the gold bullion. Gold bullion ETF SPDR Gold Shares (GLD - Free Report)  has lost about 8.5% this year versus 4.2% gains in the S&P 500.

However, things appear brighter for gold bullion as well as gold mining companies in Q2.

What Does Q2 Hold?

The Fed has been acting super-dovish since March 2020. As widely expected, the Fed held interest rates steady at a near-zero level in its latest meeting. U.S. interest rates have been this low since last March. Federal Reserve officials continued to project near-zero interest rates at least through 2023, while boosting economic growth expectations on vaccine and stimulus optimism.

Hopes of lower for longer rates should be positive for gold bullion prices.Right now, real U.S. treasury yields are negative from five-year to 20-year term and this boosts the opportunity cost of holding a non-interest-bearing asset like bullion.

Low oil prices are another plus. Mining companies’ 50% of production costs are closely linked to energy prices. After a rally this year, crude prices have been hovering around $60-level defying many analysts’ expectations that crude will touch $70 soon. This should work wonders for gold miners’ operating margins. Still-present coronavirus-led demand disruptions have been weighing on oil prices.

Then there is the latest uptick in investors’ sentiments. All credit goes to the rollout of gigantic government stimulus, signs of virus containment and vaccine distribution. No wonder, such risk-on sentiments will drive gold equities too.

Cheaper valuation and relatively low debt are other positives. Forward Price/Equity ratio for the gold mining industry stands at 11.06X versus 21.22X of the S&P 500. Debt/Equity ratio is also favorable for miners (0.00%) compared with the S&P 500 (67%).

ETFs in Focus

Against this backdrop, we highlight a few gold mining ETFs that appear healthy bets for Q2.

VanEck Vectors Gold Miners ETF (GDX - Free Report)

The large-cap gold mining fund has gained about 0.5% in the past five days while it is down 11.9% this year.

VanEck Vectors Junior Gold Miners ETF (GDXJ - Free Report)

The fund is focused on small-cap gold mining companies. The product has lost 11.9% this year, but gained 1.3% in the past five days.

Sprott Gold Miners ETF (SGDM - Free Report)

The larger-sized gold companies have gained 1.2% last week but dropped about 8% in the year-to-date frame.

Sprott Junior Gold Miners ETF (SGDJ - Free Report)

The underlying Solactive Junior Gold Miners Custom Factors Index aims to track the performance of small-capitalization gold companies whose stocks are listed on regulated exchanges. The fund is up 2.4% past week but has lost 8.5% this year.

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