The Golden Ratio: Using Gold to Evaluate Market Data
Gold mining stocks and GDX posted strong returns in 2020, with gold being one of the strongest and best performing assets in a very volatile year.
But choosing gold stocks is not easy, as every company has a variety of individual projects and risks that are worth evaluating. This is why GDX (VanEck Vectors Gold Miners ETF) is one of the most popular methods that investors choose to gain exposure to players in the gold mining industry.
While GDX and gold miners can generally offer a leveraged upside against gold during bull markets, in 2020 GDX is back. 23%, a few points from the spot gold 25.1% to recover.
This chart compares the returns of gold, GDX, and the best performing and worst performing gold mining stocks in the index.
Understanding the GDX ETF and its value
GDX is one of several index ETFs created by investment management firm VanEck and provides exposure to 52 of the major gold mining stocks.
It offers a simple way to invest in the biggest names in the gold mining industry, while reducing some of the individual risks many mining companies face. GDX is VanEck’s largest and most popular ETF, averaging around $ 25 million per day, with the largest amount of total net assets at $ 15.3 billion.
When it comes to its holdings, GDX attempts to replicate the performance of the NYSE Arca Gold Miners (GDM) Index, which tracks the overall performance of companies in the gold mining industry.
How the biggest gold miners fared in 2020
As a market capitalization weighted ETF, GDX allocates more assets to components with higher market capitalization, resulting in large gold mining companies making up a larger portion of the index’s holdings.
As a result, the five largest companies in the GDX represent 39.5% of the index’s holdings and the top 10 59.3%.
An equal-weighted index of the five main constituents of GDX returned 27.3% over the year, outperforming gold and the index by a few points. Meanwhile, an equally-weighted index of the top 10 components significantly underperformed, returning only 18.4%.
Newmont was the only company in the top five to outperform gold and the overall index, returning 37.8% for the year. Wheaton Precious Metals (40.3%) and Kinross Gold (54.9%) were the only other top 10 companies to outperform.
Kinross Gold has been the top performer among the major constituents largely due to its strong Q3 results, where the company generated significant free cash flow while quadrupling its reported net income. Along with these positive results, the company also announced its intention to increase gold production by 20% over the next three years.
The best and worst artists in 2020
Among GDX’s best and worst performers, it was the smaller companies in the bottom half of the rankings that significantly outperformed or underperformed.
K92 Mining’s record gold production from its Kainantu gold mine, as well as a significant increase in resources to their nearby high-grade Kora deposit has seen a return of 164.2%, the company switching from TSX-V to TSX at the end of 2020.
Four of the five worst performers for 2020 were from Australian mining companies as the country entered its first recession in 30 years after severe closures and restrictions related to COVID-19. Bushfires earlier this year disrupted shipments from Newcrest’s Cadia mine, and growing tensions with China (Australia’s largest trading partner) also contributed to double-digit withdrawals for some. Australian gold miners.
The lowest performing and last ranked company in the index, Resolute Mining (-36.9%), experienced further disruptions in the second half of 2020 at its Syama gold mine in Mali. The military coup and the resignation of Malian President Ibrahim Keïta in August was followed by threats of a strike from unionized workers in September, slowing operations at the Syama gold mine. Pure and simple strikes finally took place before the end of the year.
How gold mining stocks are chosen for GDX
There are some ground rules which dictate how the index is weighted to ensure that the GDM and GDX correctly reflect the gold mining industry.
In addition to the index weighting rules, there are company-specific requirements for inclusion in the GDM, and therefore the GDX:
- Earn over 50% of revenue from gold mining and related activities
- Market capitalization> $ 750 million
- Average daily volume> 50,000 shares in the last three months
- Average daily value traded> $ 1 million in the last three months
Gold stocks already in the index have some leeway regarding these requirements, and ultimately inclusion or exclusion from the index is up to us as the index administrator.
What 2021 will bring for gold mining stocks
GDX had a mixed start to the year, with an index of -2.3% because it mainly followed the spot price of gold.
Gold and gold mining stocks cooled significantly after their strong rally from Q1 to Q3 2020, as positive developments regarding the COVID-19 vaccine resulted in a stronger-than-expected US dollar and a surge Treasury yields.
That being said, the arrival of new monetary stimulus in the United States could prompt inflation-fearing investors to turn to gold and gold stocks as the year progresses.