Comparing Two Gold Miners ETFs Yields Big Results

Comparing two apparently though notably different exchange traded funds can often turn-up important results. That is the case with the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ) .

Up 21% and 27.1% year-to-date, respectively, GDX and GDXJ are two of 2014’s top-performing non-leveraged ETFs. Previously unloved miners and ETFs such as GDX and GDXJ have surged this year on the back of firmer gold prices and attractive valuations. [Gold Miners ETF Nears a Breakout]

“With gold mining stocks trading at a 58% discount to 2011 levels, gold miners’ shares remain highly undervalued relative to fundamentals in our view. Although reserve depletion is an issue that still needs to be addressed for sustainable long-term growth of the sector, cost management has substantially improved miners’ profitability. With global growth finally starting to gain momentum and seasonality of gold demand historically buoying gold miners’ shares in the third quarter, we believe now may be a good time to raise exposure to gold miners,” said ETF Securities in a note out earlier this month.

Chart watchers and technical analysts will be heartened to know that the GDXJ/GDX ratio is sending some bullish signals.

“The GDXJ/GDX ratio may have created a bullish inverse head & shoulders pattern over the past year. Of late the ratio could be forming a bullish falling wedge. Two thirds of the time this pattern leads to higher prices,” according to Chris Kimble of Kimble Charting Solutions.

GDXJ’s leadership of GDX, though not surprising because the former is a small-cap fund, is important because it highlights investors’ willingness to take on risk in an already volatile corner of the market.

For example, GDXJ has a three-year standard deviation of 44.4%, according to Market Vectors data. GDX’s three-year standard deviation is just under 32%.

“If the ratio would breakout, it would be a good sign for senior and junior miners. Keep a close eye on this index in the next few weeks because where this pattern heads from here should be important for big and small miners,” adds Kimble.

GDXJ/GDX Ratio Chart



Chart Courtesy: Kimble Charting Solutions