RING: Gold Miners Are Too Detached From Gold, Time To Buy

As gold prices consolidate near highs, gold miner stocks continue to underperform relative to the price of the precious metal. Against such background, iShares MSCI Global Gold Miners ETF (NASDAQ:RING) offers an attractive option to invest in a variety of gold miners that may finally start catching up with gold. I give the RING ETF a “Buy” rating and anticipate a bull run in gold miners.

RING ETF Overview

iShares MSCI Global Gold Miners ETF is a passively managed ETF that seeks to track the MSCI ACWI Select Gold MinersInvestable Market Index, which focuses on companies in the gold mining industry that are highly sensitive to gold prices.

The RING ETF is pretty concentrated in its holdings structure, with top-3 holdings representing over 43% of the ETF, and top-10 holdings representing 71.25% of ETF’s holdings. Among the ETF holdings, you may find such industry leaders as Newmont Corporation (NYSE:NEM), Agnico Eagle Mines Limited (NYSE:AEM), and Barrick Gold Corporation (NYSE:GOLD).

Compared to peer gold miners ETFs, the RING ETF offers a combination of lower expenses and competitive performance. With an expense ratio of just 0.39%, it looks superior relative to similar exchange-traded funds.

At the same time, the RING ETF delivered solid short-term returns (+18.19% in one month), good mid-term returns (+13.58% over the last 6 months), and great long-term returns (+33.15% over the last five years).

If we compare the RING ETF to VanEck Vectors Gold Miners ETF (NYSEARCA:GDX), the most noticeable difference is in the holdings structure. The GDX ETF is more diversified (58 holdings vs. the RING’s 47 holdings), and less concentrated in holdings weights.

Thus, if you prefer a more concentrated exposure to the gold mining sector, then the RING ETF is a better option. The only drawback I see in the case of the RING ETF is a lack of liquidity due to substantially lower AUM compared to the GDX ETF. The RING’s relatively high bid/ask spread of 0.24% vs. 0.03% for the GDX somewhat overshadows the lower expense ratio, though I don’t find this factor a deal-breaker for long-term investors.

A Bullish Case For Gold And Gold Miners

Despite high interest rates around the world, gold managed to withstand the current macro environment thanks to multiple tailwinds. First, central banks are gradually transitioning back towards gold. The share of gold as a percentage of global international reserves reached its peak of 73% back in the early 1980s, and declined to a pitiful 10-15% in 2000-2010s. However, the long-term trend seems to be reversing, which is a positive outcome for gold.

Given that the world is on the verge of economic and financial fragmentation, countries like China seem to diversify away from the US Dollar-led financial system. According to the World Gold Council, the People’s Bank of China was the largest purchaser of gold in 2023.

China stands out not only with its central bank’s purchases but with consumer demand as well. In 2023, China imported a record-high 1,447 tonnes of gold for non-monetary purposes, which may indicate that the Chinese population is shifting from real estate to gold as a primary way to keep savings.

Considering that the Chinese real estate crisis may last for many more years, a frenzy of gold buying on the side of Chinese consumers will likely persist in the foreseeable future.

Also, experts note that in the current global election cycle, it’s hard to imagine a country that cuts its budget spending, especially in the US and Europe. Heightened budget spending in the West combined with the ramping up of stimulus measures in China provide support for gold relative to fiat currencies.

In the meantime, the miners-to-gold ratio is still close to historic lows. It’s worth noting that demand for gold mining stocks was higher in the 1990s – early 2000s not only because of the market’s readiness to appreciate the sector properly but because of the lack of “pure” gold ETFs like the SPDR Gold Trust (GLD) back then. Thus, investors should take such historical references with a grain of salt, in my view.

Nonetheless, we can observe that in recent years of 2020-2021, the market valued gold miners way more generously despite lower gold prices then versus now.

The market’s willingness for capital appreciation of gold miners may depend on the interest rate environment which remains unfavorable for gold so far. Even though the Fed delays rate cuts due to persistent inflation, cutting rates stays on the Fed’s agenda in the longer term.

However, it remains a question of how long would it take for the Fed to lower rates and where the Fed would stop before hiking rates again. In my opinion, this is one of the key risks gold investors should keep in mind. Any prolonged period of lower interest rates amid severe fiscal spending and still-strong consumer demand may cause another inflation wave where new rate hikes will be inevitable.

Another important consideration for investors is that at some point, central banks may turn from net buying to net selling their gold reserves, for example, to deal with potential losses due to possible depreciation of government bonds on their balance sheets.

Finally, investors should be aware that getting exposure to gold miners is not the same as buying gold itself. Gold miners are vulnerable to operational risks and therefore may ultimately underperform even if gold prices surge.

The Bottom Line

I find the RING ETF a viable option to benefit from the ongoing rally in gold. In my view, there’s still a plenty of room for gold miners to catch up, and if you’re comfortable with the risk profile gold miners imply, then opening a long position in gold miners ETFs like the RING is a worthwhile investment idea.