Keeping Gold Gleaming Amidst Market Volatility
The recent assurance from the Federal Reserve regarding its unaltered rate cut strategy has lifted a weight off the shoulders of the market participants. With the anticipation of three rate cuts in 2024, gold’s charm as an equity hedge remains intact.
The recent surge in economic activity had stirred concerns about a potential shift in the Fed’s rate trajectory. Speculations abounded over whether the combination of rising demand, a tight labor market, and persistent inflation could prompt a change in course for the regulatory body.
However, those concerns have, for the time being, been assuaged. The Fed’s announcement on Wednesday maintained its commitment to reducing rates by 0.75% this year. As interest rates decline, the US dollar is expected to weaken, consequently heightening gold’s allure as a store of value and an equity hedge. Throughout history, falling interest rates have consistently been a boon for gold.
“Gold remains a top pick for 2024 as a valuable portfolio hedge for equity investors,” noted Bank of America Research in a recent Reuters report.
Equity Hedging Strategies: Embracing Gold’s Stability
Escalating concerns surrounding equity valuations persist in the markets. Coupled with the potential repercussions of a depreciating dollar, the appeal of hedging against equity risks stands strong this year. A study from 2018, titled “Is Gold a Sometime Safe Haven or an Always Hedge for Equity Investors,” explored the correlation of gold with equities across various timeframes. The study concluded that while gold may not serve as a significant safe haven during market downturns like the 2008 financial crisis, it does offer a reliable equity hedging mechanism.
Authors He, O’Connor, and Thisjessen underlined their findings, stating that “a review of previous research, in conjunction with our insights, indicates that gold is invariably a hedge.” They further posited that gold is, at the very least, an exceptional portfolio risk diversifier.
Tap into Gold’s Strength Through Mining Stocks
A buoyant outlook for gold prices in 2024 not only benefits individual investors but also extends to upstream entities like gold miners. Favorable gold prices this year could prove advantageous for related equities, and Sprott ETFs offers two avenues for exposure to potentially thriving mining companies.
The Sprott Gold Miners ETF (SGDM) aims to mirror the performance of the Solactive Gold Miners Custom Factors Index. This index provides access to sizeable U.S.- and Canadian-listed gold firms, emphasizing those with high free cash flow yields, robust revenue growth, and low long-term debt-to-equity ratios.
As of February 29, 2024, the fund’s composition comprises 47.23% large-cap companies with a market cap exceeding $10 billion, 31.34% medium-cap firms valued between $2 billion and $10 billion, and 21.44% companies valued under $2 billion. SDGM carries an expense ratio of 0.50% with current fee waivers.
For investors seeking exposure to budding gold miners, the Sprott Junior Gold Miners ETF (SGDJ) presents a compelling option. This fund endeavors to track the Solactive Junior Gold Miners Custom Factors Index, which includes small-cap gold mining entities with market capitalizations ranging from $200 million to $2 billion. As of February 28, 2024, the average company weight within the fund stands at $996 million.
SGDJ concentrates on gold producers exhibiting substantial revenue growth, encompassing junior exploration companies displaying robust stock price momentum. The fund carries an expense ratio of 0.50% with current fee waivers.
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The thoughts and opinions conveyed herein are those of the author and may not necessarily mirror the perspectives of Nasdaq, Inc.
