Gold equities and related exchange-traded funds listed on the TSX finally came alive on Tuesday when gold equity indexes on both sides of the border recorded positive technical signals near the beginning of a period of seasonal strength.
Seasonal influences for gold stocks and their related ETFs have started slightly earlier than usual this year. Thackray's 2013 Investor's Guide notes that the period of seasonal strength for the gold equity sector is from July 27 to September 25. The trade has been profitable in 12 of the past 16 periods for an average return per period of 8.1 per cent.
The technical profile for the S&P/TSX Global Gold index at 176.08 has just turned positive. On Tuesday, the trend changed from down to up on a move above resistance at 171.89. In addition, the index moved above its 20-day moving average and began to outperform the S&P/TSX composite index for the first time since last October. Potential upside during the period of seasonal strength is to 210.
A word of caution! Second-quarter reports released by gold-producing companies will be less than encouraging when released later this month. Earnings and revenues on a year-over-year basis have been impacted by lower gold prices and higher energy, chemical and labour costs. Also, company guidance for the remainder of 2013 will not help. Many gold producers have plans to reduce production until gold prices recover or have slowed expansion plans. However, the S&P/TSX Global Gold index already is severely depressed following a 50-per-cent decline since last October and already has anticipated most of the bad news.
Gold equities are set to recover with the price of gold. Gold at $1,281.60 (U.S.) per ounce also has a period of seasonal strength from mid-July to early October. Gold bottomed on June 28 at $1,179.40 per ounce and recently has outperformed the S&P/TSX composite and the S&P 500 index.
Canadian investors can choose between five ETFs when entering the sector. Each ETF has unique characteristics:
The most actively-traded gold equity ETF in Canada is iShares on the S&P/TSX Global Gold Index Fund (XGD $10.99) The fund tracks the performance of 50 precious metal stocks that make up the S&P/TSX Global Gold index. The index is capitalization-weighted. The largest holding are Goldcorp, Barrick Gold, Newmont Mining, Yamana Gold, Franco Nevada, Kinross Gold, and Agnico Eagle. Management expense ratio is 0.55 per cent.
Horizons offers the BetaPro S&P/TSX Global Gold Bull + ETF (HGU $9.36) and the BetaPro S&P Global Gold Bear + ETF (HGD $22.64). Both are leveraged ETFs that track the S&P/TSX Global Gold index. The Bull ETF is designed to generate twice the daily upside performance of the index. The Bear ETF is designed to generate twice the daily downside performance of the Index. Management expense ratio is 1.15 per cent.
Horizons also offers the AlphaPro Enhanced Income Gold Producers ETF (HEP $6.73). The ETF tracks the performance of a portfolio holding 15 equally-weighted senior global gold and silver producers. At or near the money listed call options are written against security positions. Option premiums and dividends earned by the fund are distributed to unit holders on a monthly basis. The strategy is enhanced by high implied volatilities on the call options of senior gold producer stocks. Management expense ratio is 0.65 percent.
Bank of Montreal offers the BMO Junior Gold Index ETF (ZJG $7.70). The ETF tracks a diversified portfolio of 30 junior gold stocks that make up the Dow Jones North American Select Junior Gold Index. The index is capitalization-weighted. Largest holdings are Alamos Gold, B2 Gold, Coeur Mines, Detour Gold and Argonaut Gold. Management expense ratio is 0.55 per cent.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and exchange-traded funds. Daily reports are available at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.