Interactive Investor

Why it has been a bad month for gold mining ETFs

28th June 2021 10:53

Tom Bailey from interactive investor

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Many investors use gold mining stocks as a ‘leveraged’ play – but this of course works both ways.

Gold has had a rocky 18 months. In 2020, the yellow metal’s price surged up by over 40% from its March 2020 lows, reaching a new record high just above $2,000 an ounce.

Behind this strong performance was increased investor appetite owing to market uncertainty and fear, as well as historically low interest rates. Gold produces no dividend or cash flow. However, with real interest rates at or below zero, its appeal increases.

However, by August of last year, gold prices were already retreating from these highs. Despite some strong rallies, the metal has broadly struggled ever since. Year-to-date, it is in negative territory, with the iShares Physical Gold ETC (LSE:SGLN) down by over 7% in sterling terms.

The past month has also been a torrid one for gold. As is often the case with asset prices, this is largely the due to the US Federal Reserve. It recently signalled that it would hike rates in 2023, a year earlier than expected. As one of the main drivers of gold prices has been persistently low interest rates, the prospect of faster interest rate rises means lower gold prices. Over the course of June, the iShares Physical Gold ETC is now down around 3.3% (as of 25 June).

However, while June has proven to be a bad month for gold prices, it has been even worse for gold miners. The VanEck Vectors Gold Miners ETF (LSE:GDX) is down 11.3% over the month, while the L&G Gold Mining UCITS ETF (LSE:AUCO) is down almost 14%. The VanEck Vectors Junior Gold Miners ETF (LSE:GDXJ) has fared slightly better, but it is still sitting on a loss of 10.5%.

Many investors use gold mining stocks as a leveraged way to gain exposure to gold price increases. When gold prices rise, typically the price of gold miners increases further. But of course, this works both ways, as we are seeing right now. When the gold price falls, gold mining stocks typically post bigger losses.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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