Key Points

• Robust mining stocks value
• Quantitative Easing and Debt Monetization
• Correlation with the U.S. Dollar

GDX is holding 53 different gold miners and is undeniably correlated to fluctuations in gold prices under most financial scenarios. Given the propensity of gold to rally hinged on the Dollar and S&P 500 correlations, Gold ETFs are inclined to generate positive returns. Based on the current markets’ expected return for gold, GDX will likely be the stronger holding due to its tendency to outperform in similar environments.

The mining sector has been overall stable through the entire year despite the slump in other sectors of the global economy. Miners enjoyed good returns based on the dynamics from the Demand side rather than the Supply side. Prices of the “yellow metal” climbed to all-time-highs to trade at US$2071 per ounce. The latest median all-in sustaining cost, or AISC, is US$923 per ounce, down from US$947 per ounce in the third quarter of 2019 across 17 large miners, according to S&P Global Market Intelligence data. High gold prices versus low production costs guarantees upbeat mining stocks’ earnings.

Quantitative Easing has created surplus liquidity in the financial markets which investors are utilising through investing in risk assets and the more stable ETFs. The notable Stimulus package delivered during the course of the year is the U.S. Federal Reserve’ package back in March 2020. As highlighted in the chart below, GDX rallied and managed to reach new highs around US$48.00. Post U.S. presidential elections, another stimulus package is expected and the market reaction will be a bull run on gold stocks among others assets.

Debt Monetization by major Central Banks from across the globe is eroding the value of fiat money. Therefore, long-term long investors are disposing off cash in favour of gold denominated assets.

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Gold assets are highly correlated to the U.S. Dollar in short to medium term. In the long run the fundamentals might deviate from the expected medium term expectations. As depicted in the chart below, as the greenback weakness over time, Gold continued to rise over the same period.  During periods when the dollar is weakening, dollar-priced commodities and metals generally increase in market value. However, the predictive nature of the relationship suggests that investors to a degree act on historic changes in the dollar as an investment catalyst driving future decisions. Based on the evidence of weakening dollar, the expected market reaction would be that gold investors are going to be piling into the commodity in the next trading period.

Investors generally seek after assets with good yields and when the S&P 500 fails to deliver, they tend to seek out alternative instruments. This relationship assists in explaining the correlation between unenthusiastic market returns and strong performance in gold related assets.

The future trend for Gold ETFs is inclined towards the upside as economic fundamentals are likely going to remain as the key drivers of the financial markets. Geopolitical risks are relatively low, unless the Sino-US tension re-escalates in the coming year. On the supply side, the discovery of new gold reserves in Siberia might be guarantee ample supply in future to meet up with increased demand in Asia.