GDX: Find The Weakness

ETFS

Since the first half of August in 2016, the VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) has witnessed declines of -28.06%. However, the year 2019 has already experienced several instances of emerging volatility in stocks and this activity has centered more of the market’s attention on the protective nature of precious metals assets. With gold prices finally beginning to generate impressive rallies, it makes sense for investors to take a deeper look into the mining companies that are most likely to benefit from the market’s rising valuations in metals. GDX continues to be the primary candidate, as even its weakest component finds itself on a stable fundamental footing and rising valuations in the underlying price of gold should continue to support the bullish outlook.



(Source: Author, TradingView)

In spite of its long-term weakness, the senior metals miners’ ETF is once again pressing into important resistance levels near $25. This area (pictured above) rests just 5.3% above current prices and this means investors will soon need to make an important decision about whether it is time to start buying or selling. A look at the recent fund flow activity which has been directed toward the GDX ETF can give us clues about the likely outcome, and here we can see some interesting trends already developing.



(Source: ETFdb)

From a short-term perspective, the market’s fund flow activity appears to be heavily bearish. In the last 26-week period, GDX has been negatively impacted by outflows of -$895.6 million. This puts the fund at the bottom of its category averages and may lead some to believe that investors could continue selling positions in GDX. However, the most important elements of the GDX fund flow activity can be found in the longer-term metrics (which remain unequivocally positive).

During the last three years, GDX is showing inflows of $2,790.1 million and this puts the fund at the top of its category averages. The trend over the last year has been even more forceful, as the market has generated GDX inflows of $1,722.5 million during this time period. Essentially, what this tells us is that bullish investor sentiment has been rising as valuations have declined and that this activity could grow in momentum now that the underlying gold prices are finally beginning to generate upside traction.

To remove another part of the bearish argument directed at GDX, it might also be useful to look at the weakest link in the fund and assess some of the criticisms which have been directed at Barrick Gold Corp. (NYSE: GOLD). For analysts, one of the most widely discussed problems with the ETF has been its large exposure to Barrick’s excessive debt levels.



(Source: ETF.com)

Barrick Gold Corp. currently makes up about 10.16% of the total holdings in GDX, which is a fairly substantial figure. Arguments suggesting the stock is a weak fund component tend to center around its problematic leverage ratios, as Barrick’s leads the pack of senior gold miners with a debt-to-equity ratio of more than 75%.

We can compare the unfavorable nature of this elevated ratio with a metals mining industry peer like Kinross Gold (NYSE: KGC), which has a debt-to-equity ratio that is roughly half of this number (at 38.5%). Amongst the gold miners, most of the key names in the group have managed to pay off a majority of the total level of debt accumulated. Barrick has been something of an exception here but the company has made significant progress in reducing these debt figures over the last four years. During this period, Barrick Gold Corp. has cut debt by nearly 60% (to roughly 5.7 billion by year-end 2018 from $13.4 billion at year-end 2014). Of course, companies like Newmont (NYSE: NEM) have been even more impressive in these areas (cutting net debt more than 80% since 2013), but it can’t be denied that these figures indicate a highly favorable trend for Barrick.



(Source: Investor Presentation)

Ultimately, Barrick’s first-quarter earnings performances actually surpassed analyst expectations and the company has made great strides forward to improve its debt profile. During the first-quarter period, Barrick Gold reported $0.11 in EPS on $2.093 billion in revenues. This performance beat the estimates for earnings indicated in the analyst consensus ($0.09 per share) and was roughly in-line on the revenue side. Cost-cutting strategies may continue to aid Barrick’s quarterly results but the steady increases we are seeing in the underlying price of gold suggest the mining company may have an even stronger performance during the second quarter.

As a result, we can see there are several factors supporting the bullish outlook for GDX and the central negative argument amongst analysts is not as problematic as some might believe. Gold prices are finally generating impressive rallies, so it makes sense for investors to build exposure to the companies that are most likely to benefit from the market’s rising valuations in metals. Overall, even the weakest component of GDX is on a stable footing and rising valuations in the underlying price of gold should continue to support the bullish outlook for the ETF.

Thank you for reading.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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