Gold ETFs started 2014 on a positive note after a dismal 2013 as net ETF outflows in gold were zero in contrast to the 177 tons of outflows witnessed in the year-ago quarter. Last year, gold ETFs had suffered massive outflows as the slump in prices tarnished its image as a gold haven, thereby affecting demand for gold ETFs.
In the first quarter, tensions in Ukraine and concerns over the global economy made investors flock to gold as a risk diversifier, which resulted in positive monthly inflows to ETFs in February, for the first time in over a year. This was repeated in March. Extreme low valuation also opened up buying opportunities for gold ETFs. (Read: Will Gold ETFs continue to shine?)
A See-Saw Ride for Prices in 2014 So Far
After a lackluster 2013, which dealt a blow to the 12-year bull run for gold, the yellow metal somewhat regained its prominence in 2014. Gold started 2014 at $1,223 per ounce and rose steadily, thanks to the growing demand for jewelry in China, the largest consumer, during the Lunar New Year. In mid March, gold attained a six-month high of $1,388 per ounce. The 13% gain since the start of the year was stoked by Ukraine worries, fears of slowdown in China and weak U.S. economic data that drove investors to the bullion as a safe haven.
However, the bubble soon burst with gold prices again falling below $1,300 per ounce in late March on stronger-than-expected U.S. economic data. After see-sawing on either side of $1,300, gold prices plummeted to around $1,250 per ounce in late May. Positive U.S. economic indicators boosted the dollar and pushed the gold price in the opposite direction.
Investors took the opportunity to shift from gold and flock to the stock markets instead, sending New York indices to record territory. Gold’s safe-haven status during times of political turmoil was diluted by waning concerns over Ukraine. Moreover, lower demand in China as well as India in contrast to the unprecedented demand for jewelry, gold bars and coins in the wake of low prices last year also kept prices in check. (Read: 4 Great Reasons to buy commodity ETF Now)
Iraq, India and China Hold the Key to Current Gold prices
In June, with Ukraine gone from the headlines, gold prices and related ETFs continued to gain ground amid fresh bouts of geopolitical tensions in Iraq. Investors were also cautious after U.S. President Barack Obama warned of a possible military intervention in Iraq. All eyes will now be on the Middle East and if the situation worsens, gold will once again regain its safe haven status and prices could move up. Furthermore, focus will also be on the U.S. Federal Reserve's monetary policy statement and Fed chief Janet Yellen's press conference on June 18.These are also expected to influence gold prices.
India has also slashed import duties in view of the weakness in bullion prices. This will further give a boost to gold. India had curbed bullion imports last year, including a record 10% duty on overseas purchases to address the high current account deficit. Gold is the second largest import item for India after petroleum. (Read: Bear Market for India ETFs following Modi’s election)
The easing of restrictions and the upcoming wedding season would again stir up gold demand in the second largest gold consuming nation. Even though strength in the U.S. and European equity markets will distract gold investors, gold prices will get a solid thrust from retail demand for gold, particularly in India and China.
Moreover, production pullbacks in response to lower gold prices last year and mining development delays could lead to a supply crunch. If so, gold prices would be pushed higher. Additionally, the Fed is committed to keeping interest rates low for some time. Thus, even with tapering in place, gold might regain its luster for this year.
ETFs to Tap the Sector
Below, we highlight the ETFs in this sector in greater detail for those seeking to make a gold-mining ETF play at this time.
Market Vectors Gold Miners ETF (GDX - ETF report)
GDX is one of the popular gold ETFs on the market today with asset under management of $7.23 billion and a trading volume of roughly 28,045,308 shares a day. The fund charges an expense ratio of 53 basis points a year with a dividend yield of 0.79%.
The ETF was formed on May 15, 2006, to track the NYSE Arca Gold Miners Index. The Index provides exposure to publicly traded companies worldwide that are involved primarily in gold mining, representing a diversified blend of small, mid and large-capitalization stocks. The fund holds 39 stocks in its basket, with a concentrated approach in the top 10 holdings with 66.4% of the asset base invested in them.
Among individual holdings, top stocks in the ETF include Goldcorp Inc. (GG), Barrick Gold Corporation (ABX) and Newmont Mining Corporation (NEM) with asset allocation of 13.44%, 13.12% and 7.86%, respectively.
Market Vectors Junior Gold Miners ETF (GDXJ - ETF report)
Another popular choice in the gold miners ETF market is GDXJ, a fund tracking the Market Vectors Junior Gold Miners Index, which provides exposure to small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining. The product has $1.73 billion in assets with a daily volume of 6,490,120 shares. It charges 57 basis points in annual fees.
The fund has a total holding of 65 stocks with approximately 96% weightage in small cap companies and the rest in mid caps. It is widely spread with none of the companies holding more than 5.04% of assets. SEMAFO Inc., Primero Mining Corp. (PPP), and Torex Gold Resources Inc (TXG.TO) occupy the top three positions in the fund with asset allocation of 5.04%, 5.01% and 4.78%, respectively.
Global X Gold Explorers ETF
The fund seeks to match the performance and yield of the Solactive Global Gold Explorers Index, which tracks companies actively involved in gold exploration. Formed in November 2010, the ETF now manages assets worth $37.65 million. With a daily volume of 68,280 shares per day, the fund charges 65 bps in annual fees.
It is spread across 21 small cap securities with the top 10 holdings comprising 60.31% of assets. ATAC Resources Ltd. (ATC.V), Papillon Resources Limited (PAPQF) and NovaGold Resources Inc. (NG) command the top three positions in the basket representing 7.66%, 7.55% and 6.50% of net assets respectively.
iShares MSCI Global Gold Miners (RING - ETF report)
The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI ACWI Select Gold Miners Investable Market Index. This index measures the equity performance of companies in both the developed and emerging markets that derive the majority of their revenues from gold mining. The index also includes companies that do not hedge their exposure to gold prices.
The ETF has over $56.05 million in AUM and a daily volume of about 56,703 shares, while it is also a low-cost pick with expense ratio of 39 basis points a year. It has a dividend yield of 1.32%.
The fund debuted in January 2012 and currently has 38 companies in its basket, with the top 10 holding 73% of the assets. The top stocks include Goldcorp, Barrick Gold Corporation and Newmont with asset allocation of 17.06%, 16.53% and 9.86%, respectively.
PowerShares Global Gold & Prec Metals (PSAU - ETF report)
PSAU was launched in September 2008 and has been designed to track the NASDAQ OMX Global Gold & Precious Metals Index. It has a trading volume of just 8,748 shares a day, but is a bit pricey as it charges investors 75 basis points on an annual basis. The fund fetches a dividend yield of 0.60%.
This fund has a total holding of 64 stocks. Among individual holdings, Goldcorp, Newmont and Barrick Gold occupy the top three positions with an asset share of 7.96%, 7.36% and 7.12%, respectively.
Global X Pure gold Miners ETF
The ETF is linked to the Solactive Global Pure Gold Miners Index, which tracks the performance of the largest and most liquid gold mining companies globally.
Formed in March 2011, the ETF has assets worth $3.94 million. With a daily volume of more than 4,380 shares per day, the fund charges 59 bps in annual fees and has a dividend yield of 0.94%.
It is spread across 25 companies with the top 10 holding 54.07 % of total net assets. Sibanye Gold Limited (SBGL), Detour Gold Corporation (DGC.TO) and Centamin Egypt Gold hold the top three positions representing 7.1%, 6.35% and 6.22% of the net assets, respectively.
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