A Golden Side Of The Gold Miners Trade

If conventional wisdom served to investors prior to the Brexit vote proves accurate, gold's go-go days should continue because at the time of this writing late Thursday night, the BBC is projecting Britons voted in favor of Great Britain leaving the European Union.

Not surprisingly, global equity futures and the British pound plunged while safe havens, such as gold and the Japanese yen rallied. So it wouldn't be surprising to see a small amount of equity-based exchange traded funds end the week in the green. Chances are that thin will group will funds such as the VanEck Vectors Gold Miners ETF GDX and the VanEck Vectors Junior Gold Miners ETF GDXJ.

As has been widely documented, miners and ETFs such as GDX and GDXJ are making major comebacks this year. GDX and GDXJ, the two largest gold miners ETFs, are up 83.8 percent and 107.1 percent, year-to-date, respectively.

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Although it appears unlikely the Federal Reserve will raise interest rates this month and the same can probably be said of July, the Fed is intent on boosting borrowing costs. Even it does, U.S. interest rates will still be nowhere to close to historical norms, indicating any punishment delivered to gold ETFs in the wake of rate hikes could be short-lived. Additionally, it looks like NIRP will remain throughout much of the developed world.

Obviously, gold miners are getting a lift this year from rising bullion prices, but investors should also acknowledge the improving financial positions of some of the companies found in GDX and GDXJ. During the worst days of golds bear market, many gold miners trimmed fat, opting to pare production and shore balance sheets.

“Despite this rally in the price of gold and the higher cash flows that come with it, it is encouraging that the management teams of the gold miners with whom we have recently met remain firmly committed to growing profitability and returns rather than production,” according to VanEck.

Gold offers further enticement as a whopping $8 trillion in global investment-grade sovereign debt currently sports negative yields, meaning investors that make those bets will lose money. The World Gold Council adds 40 percent of global sovereign debt sports yields below one percent.

"We heard more than once in our discussions that a new ounce of production is only good, and will only be added, if it improves or maintains the existing per ounce profitability of the company. Their initiatives have slowly and cautiously started to shift from mere survival to thriving. But caution remains the name of the game,” adds VanEck.