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  • Upward trend in the gold market: 20% growth potential for VanEck Gold Miners ETF with moderate risks
Max Manturov

Max Manturov

Head of investment research regulated by CySec 21.03.2022

Upward trend in the gold market: 20% growth potential for VanEck Gold Miners ETF with moderate risks

Because of the risks amidst tougher sanctions against Russia by the West, investors and traders are moving into safer assets. Gold is one of them. Since the beginning of the year, the metal has added 7.5% to value, rising to $1935 an ounce.

The volume of gold in the global economy is limited. However, an increase in demand for the asset, leads to a rise in gold miners' stocks. Analysts have broken down the prospects in this niche and prepared three investment ideas of different risk levels.

What's the idea?

Take advantage of stagnant diplomatic relations between the West and Russia and volatility in stock and commodity markets to capitalise on the demand for gold. Profit by buying VanEck Gold Miners ETF (GDX) units and shares in Wheaton Precious Metals Corp and Hecla Mining Company. A detailed breakdown of specific gold miners can be found in the respective materials (Part 2, Part 3).

Investments for conservative investors - VanEck Gold Miners ETF units

Ticker: GDX.US
Entry price: $37.22
Target price: $45
Growth potential: 20.90%
Time horizon: 12 months
Risk: Moderate
Position size: 5%
Current dividend yield: 1.42%


Buy VanEck Gold Miners ETF >>

The ETF

The VanEck Gold Miners ETF tracks the NYSE Arca Gold Miners Index (GDMNTR).

It covers 50+ companies from 9 countries. The top 5: Newmont Corporation (NEM.US) - 17.42%, Barrick Gold Corporation (GOLD.US) - 12.41%,  Franco-Nevada Corporation (FNV.US) - 8.78%, Agnico Eagle Mines Limited (AEM.US) - 7.43%, Wheaton Precious Metals Corp. (WPM.US) - 6.06%.

The company's key indicators:

  • Assets under management, AUM - $15.7bn
  • Assets under management, AUM - $15.7bn
  • Expense Ratio - 0.51%
  • P/E ratio - 15.49x
  • ETF return over the last six months - 15.08%
  • KID

Two factors that drive industry growth

1.Demand for gold rises due to the global political confrontation

In turbulent times, money depreciates, virtual currencies are unstable, and companies' shares decline in value. In such cases, investors choose gold, an asset that does not age, does not deteriorate and grows in the long term.

Historically, we have seen gold surge to record highs during the Doomsday War (1973), the second oil crisis (1979), the US mortgage crisis (2007), the Lehman Brothers bankruptcy (2008), COVID-19 (2020).

Interest in the asset is now on the rise due to high volatility in the commodities market, tough sanctions and tensions between Russian and Western political institutions. The Thomas C. Chiang study recommends that at this time, "gold should be seen as a hedge against uncertainties".

2.Inflation continues to rise

The policies of the Fed and other central banks under COVID-19 caused a wave of liquidity. Inflation, which was initially thought to be temporary due to supply problems during the pandemic, turned out to be a structural problem for the economy. The consumer price index rose to its highest level in almost 40 years (inflation reached 7.9% in February).

Although experts say that gold does not protect against inflation, the reality is different. The five-year correlation between gold prices and the CPI (Consumer Price Index) is 0.79, reflecting a strong long-term relationship.

Source: TradingView

If inflation is persistent, it will lead to higher gold prices. As a result, gold miners will also rise.

Gold rises - gold miners raise prices

Gold mining companies have increased positive sensitivity (Beta) to gold. If, for example, a company's Beta is 2, its value will rise by 2% on average when the underlying asset adds 1%.

The risk of rising interest rates

If the Fed raises rates sharply against the consensus, inflation expectations will likely fall. This will slow the rise in commodity prices and gold prices. While the Fed is slowly winding down its QE programme, it raised rates to 0.5% on March 16, to which the market has reacted exceptionally positively, and gold did not go into a sell-off.

The market now expects that a rate hike of up to 2% will be able to neutralise the risk of inflation. But the Ray Dalio Foundation of Bridgewater Associates believes that this increase will not be enough. Moreover, the risk of new viruses could limit the Fed's tightening policy.

Conclusion

Harsh economic sanctions on Russia have increased commodity and metal prices, raising fears of rising inflation. Looking for stability, investors are opting for the most conservative asset - gold.

Metal prices have already risen by 11% since the start of the year. Buying units of the VanEck Gold Miners ETF will give you the potential to benefit overall from the upward trend in the industry. It is a risk-weighted investment.

If you are willing to take more risk and expect higher returns, consider buying shares in specific companies: Wheaton Precious Metals Corp. (to invest) and Hecla Mining Company (to invest).

How to take advantage of the idea?

  1. Buy ETF at a price of $37.22.
  2. Allocate no more than 5% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
  3. Sell when the price reaches $45.

How to Buy ETFs?

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

After opening an account, you can buy ETFs in either of the following ways:

Freedom24 Web Platform: In the Web Terminal section, type in the search box, and select the appropriate ETF in the results. Open a secure session in the trading window on the right, select the number of securities you want to buy, and click Buy.

Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type and select the appropriate ETF in the results. You will then see the ETF in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of securities you want to buy and click Buy.


Buy VanEck Gold Miners ETF >>


*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Europe Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance Europe Ltd. do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance Europe Ltd. and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.


  • Sources of information

    https://goldprice.org/

    https://www.bloomberg.com/news/articles/2022-03-13/gold-dealers-swamped-by-demand-as-war-creates-inflation-scare?srnd=premium-europe&sref=Y0jVLcFo

    https://en.freedom24.com/ideas/12041-wheaton-precious-metals-investidea

    https://en.freedom24.com/ideas/12042-hecla-mining-company-investidea

     https://www.vaneck.com/us/en/investments/gold-miners-etf-gdx-fact-sheet.pdf

    https://www.newmont.com/home/default.aspx

    https://www.barrick.com/English/home/default.aspx

    https://www.franco-nevada.com/Home/default.aspx

    https://www.agnicoeagle.com/English/home/default.aspx

    https://www.wheatonpm.com/Home/default.aspx

    https://www.vaneck.com/us/en/investments/gold-miners-etf-gdx/documents/

    https://www.sciencedirect.com/science/article/abs/pii/S0301420721005535

    https://www.investing.com/economic-calendar/cpi-733

    https://www.agnicoeagle.com/English/home/default.aspx

  • Recommendation evaluation methodology according to Market Research Terms of Use
    Freedom Finance analysts perform a three-stage analysis. They select a promising industry based on the latest news, statistics and industry-specific metrics. They assess the supply and demand situation and its future development dynamics. Industry’s investment attractiveness is mostly affected by the forecasted market growth rates; total addressable market, player concentration level and likeliness of a monopoly formation, as well as the level of regulation by various entities or associations.

    The assessment is followed by the comparative analysis based on the selected sample. The sample comprises companies with a market capitalization of over USD 1 billion, but there is space for exceptions (when the suitable level of liquidity for company’s securities is available on the stock exchange). The selected companies (peers) are being compared against each other based on multipliers (EV/S, EV/EBITDA, PE, P/FCF, P/B), revenue growth rates, marginality and profitability (operating income margin, net income margin, ROE, ROA), and business performance.

    Having completed the comparative analysis, the analysts carry out a more in-depth research of the news about the selected company. They review company’s development policy, information about its current and potential mergers and acquisitions (M&A activity), and assess the efficiency of company's inorganic growth and other news about it over the past year. The main objective at this stage is to identify the growth drivers and evaluate their stability, as well as the extent of impact they have on the business.

    Based on all the data collected, the analysts determine the weighted forecasted figures of company’s growth rates and proposed business marginality, which are used to calculate the company’s multiplier-based estimated value. The said value enables setting the stock price target and stock value growth potential.

    The expected timing of the idea implementation is set depending on the current market situation, volatility level and available forecasting horizon for industry and company development. The forecasting period is normally set between 3 and 12 months.