Gold ETFs Could Be Supported by Bullion Scarcity
Tue June 11 2024
Scarcity has long been a supporting factor in the gold investment thesis. The exact extent to which bullion supply is limited is difficult to quantify. But it’s widely believed the supply of the metal is limited. That supports its status as a precious metal.
While “peak gold” might not be a near- to medium-term concern, there are some supply dynamics that could be supportive of upside for ETFs such as the VanEck Merck Gold Trust (OUNZ). Notably, production for the white metal rose 4% in the first quarter. But overall output has been stagnant over the past several years. That indicates miners are encountering difficulty finding new gold deposits.
Many of the deposits miners have already tapped are depleted or nearing that status. Lower supply growth or even contracting supply could be a boon for ETFs such as OUNZ that are backed by physical holdings of gold.
Gold ETF OUNZ’s Supply-Related Tailwinds
There are supply issues that could be viewed as constructive for gold prices and thus ETFs such as OUNZ. For example, in a recent interview with CNBC, World Gold Council (WGC) Chief Market Strategist John Reade noted global gold output surged over the decade starting in 2008.
However, it’s getting harder for miners to locate viable deposits. Likewise, precious metals mining is a capital-intensive endeavor. Over the past several years, gold miners have prioritized firming their balance sheets, eliminating debt, and returning capital to investors rather than profligate spending on large-scale mining projects.
Time Is a Factor
Then there’s the time factor. A miner can identify a credible gold mine today. But it could take 10 years or more to develop the deposit such that output covers and exceeds mining costs.
“Additionally, many mining projects are planned for remote areas that require infrastructure such as roads, power, and water, resulting in added costs in building these mines and financing operations, Reade said,” according to CNBC.
Miners are looking to conserve capital and bolster sustainability credentials. But some locations are considered too costly or potentially environmentally harmful to make the juice (the gold) worth the squeeze.
Another factor that could work in favor of OUNZ over the near term is improving global economic growth. That could be supportive of upside for other currencies against the dollar. The yellow metal is denominated in dollars. That means it can benefit from greenback weakness.
“In addition, the ongoing improvement in global growth outside of the US could temper dollar performance as the currency tends to appreciate during times of risk and vice versa. For example, recent data showed that the eurozone grew by 0.3% in the first quarter of this year following five quarters of stagnant or negative growth. More globally, fears of a recession have also receded,” according to the WGC.
Source: https://www.etftrends.com/