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Is Time Ripe for Gold Mining ETFs Amid Rising Tensions?

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After some smooth trading in the first half of the year, gold has been stuck in a relatively tight range of around $1,300/oz lately. Though strengthening U.S. economic activity and a strong dollar are weighing on the performance of the yellow metal, renewed geopolitical concerns are reinforcing its safe haven appeal across the board.

This is especially true as tensions escalate in Ukraine with increasing Russian military action on the border, aggravating relationship between Russia and the western world on harsher sanctions. The list of woes go on with the Argentina default, a bloody Gaza strip, Iraq violence, Chinese slowdown and a struggling European economy yet again.

Given that these concerns will likely continue at least in the near term, the bullion is expected to climb higher in the coming days. As gold miners trade as a leveraged play on underlying precious metals, they tend to experience more gains than their bullion cousins and are expected to emerge as the real winners (read:A Comprehensive Guide to Gold Mining ETFs).

In addition, the International Monetary Fund (IMF) recently cut global economic growth forecast from 3.7% to 3.4% for this year based on weak growth in the U.S., China and some key emerging markets. The bleak outlook will lead to retraction in equities and propel the demand for the yellow metal higher. Moreover, increasing inflationary pressures are stimulating the appeal of gold as a hedge against inflation and a store of value.

Is there a Dark Side?

Nevertheless, the current global demand/supply dynamics are not in favor of the precious metal, suggesting rough trading for gold mining stocks. This is because gold demand in China, which overtook India last year as the largest consumer, dropped 19% in the first half of 2014. Sluggish demand for gold bars (down 62%) and gold coins (down 44%) outweighed the increase in jewelry demand (up 11%).

Further, the reiteration of 10% import duty on gold continued to dampen the demand for the bullion in India. The two countries together account for nearly three-fourths of the world’s gold demand, thereby pushing gold price and mining stocks lower (read: Gold Mining ETFs Slip Following Mixed Earnings Results).

Add to it the possible interest rate hike by the Fed sooner than expected as the U.S. economy gathers steam having accelerated 4% in Q2. This concern could further dampen the performance of gold mining stocks.

Gold Mining ETFs on Watch

Given the mixed sentiments, investors should carefully watch for developments in the gold mining space in the coming months to avail opportunities as and when they arise. As such, we have highlighted three popular gold mining ETFs that could be interesting plays, especially if fundamentals for the gold market continue to improve (see: all the Materials ETFs here).

Market Vectors Gold Mining ETF ((GDX - Free Report) )

This is the most popular and actively traded gold miner ETF with AUM of $8.6 billion and average daily volume of 31.9 million shares. The fund tracks the NYSE Arca Gold Miners Index, holding 40 stocks in its basket. Canadian firms account for roughly two-thirds of the assets, followed by the U.S. (12.9%) and South Africa (8.2%).

The product has some concentration issues, as it allocates nearly one-third of its assets to the three biggest holdings – Goldcorp (GG), Barrick Gold (ABX) and Newmont Mining (NEM). Further, the ETF has a definite tilt toward mid caps, as these make up for half of the share while the rest is roughly evenly split between large and small caps. The fund charges 53 bps in annual fees and has gained over 26% in the year-to-date timeframe.

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

This ETF targets the small cap segment of the gold mining industry by tracking the Market Vectors Global Junior Gold Miners Index. Once again, Canadian firms take the lion’s share at 68%, though Australia (22.2%) and the U.S. (5.9%) round out the top three. The fund holds 62 stocks in its basket and is pretty well spread out across each component.

Small Canadian firms – Semafo, Torex Gold Resources and Oceanagold – occupy the top three positions with none allocating more than 5.09% of assets. The product has amassed $2.5 billion in its total asset base and sees solid trading of more than 5.3 million shares per day on average. The expense ratio came in at 0.57%. GDXJ is up nearly 37% so far this year (read: Will the Uptrend in Gold Mining ETFs Continue?).

iShares MSCI Global Gold Miners ETF ((RING - Free Report) )

This fund is the cheapest choice in the gold mining space, charging just 0.39% in fees and expenses. The fund has been able to manage assets worth $68.7 million while it trades in moderate volume of 56,000 shares. The ETF follows the MSCI ACWI Select Gold Miners Investable Market Index and holds 37 securities in its portfolio.

Similar to GDX, the product is heavily concentrated in the top three firms – GG, ABX and NEM – which combine to make up 40.7% of total assets. Country holdings are also similar, with Canada as the top country, followed by the U.S. and South Africa. The fund added 22.5% in the year-to-date timeframe (read: New Smart Beta Gold Mining ETF Hits the Market).

Bottom Line

Investors should note that these products have shown a huge run up in its prices when compared to gains of 8.2% for the plain-vanilla gold ETF (GLD - Free Report) and 4.9% for the broad market fund (SPY - Free Report) in the same period. This trend is likely to continue in the coming months as rising geopolitical risks compel investors to take a flight to safety.  

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