Gold Mining ETFs Are Crashing
Gold has been the worst hit commodity of this year after oil, plunging nearly 6% so far. This is especially true in the backdrop of the strengthening dollar and the looming interest rates hike sometime this year – two conditions that are tempering the safe haven appeal across the board. The decline deepened recently when the Fed stated that it is on track to increase interest rates this year as the world’s largest economy continues to gain traction. The Chinese disclosure about its gold holdings for the first time since April 2009 also added to the bearish sentiments for the yellow metal. Though Chinese gold reserves jumped 57% at the end of June from the last disclosure six years ago, the increase was only half of what the market had expected. This triggered off a number of stop losses on the gold contracts today. Apart from these, a spate of positive economic data, waning gold demand, and weak overseas trends continued to tarnish the metal badly. As fears over the Greece crisis fades, gold is losing its allure as a store of value and an alternative investment to risky assets during economic and political uncertainty. Further, the divergent monetary policies in the U.S., and the other developed and developing countries will continue to result in appreciation of the U.S. dollar against a basket of currencies. This would in turn lead to lesser demand for gold. The bullion has broken its major support level of $1100 per ounce for the first time since March 10 in the early trading session yesterday, suggesting a bleak outlook for the yellow metal. Notably, key gold products like GLD , IAU and SGOL lost 5.6% each over the past one month. While these performances have been bad, things are worse in the gold mining space. Acting as a leveraged play on underlying metal prices, metal miners tend to experience more losses than their bullion cousins in a declining metal market. Gold Mining ETFs Performance (one-month) Performance (Year-to-date) Sprott Junior Gold Miners ETF (NYSEARCA: SGDJ ) -20.16% -7.62% Market Vectors Gold Mining ETF (NYSEARCA: GDX ) -19.27% -16.10% Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ ) -18.50% -11.83% iShares MSCI Global Gold Miners ETF (NYSEARCA: RING ) -18.35% -16.38% Sprott Gold Miners ETF (NYSEARCA: SGDM ) -17.63% -19.93% PowerShares Global Gold and Precious Metals Portfolio (NASDAQ: PSAU ) -17.53% -15.63% Global X Gold Explorers ETF (NYSEARCA: GLDX ) -12.73% -10.34% From the above table, it is clear that selling pressure has been intense for gold miners and that the recent trend is extremely troubling for investors given the dollar strength and bearish investors’ sentiment. Most products lost close to 20% over the trailing one-month period with GDX, RING and SGDM touching new all-time lows in Friday’s trading session. After this year’s drop, gold mining stocks have now become cheaper than gold bullion since at least the 1980s, as per the Bloomberg . Thus, many analysts view the gold miner space as an attractive entry point. In particular, Morgan Stanley upgraded the outlook for the world’s largest gold miner – Goldcorp (NYSE: GG ) – to overweight from equal weight early this month. However, some are expecting further weakness in the days ahead. Further, the gold mining industry has the worst Zacks Rank in the bottom 26% at the time of writing, suggesting some underperformance in the months to come. Hence, investors should be extremely cautious before thinking about treading into this rocky space. Still, risk-tolerant long-term investors could do some bottom fishing and might consider this slump as a buying opportunity, should they have the patience for extreme volatility. This is because much of the negative factors, such as rise in interest rates and a strong dollar, has been discounted as of now, underscoring some short covering anytime soon. Original Post