Gold mining exchange traded funds were among last year’s most notorious and worst ETF performers. The largest member of the group, the Market Vectors Gold Miners ETF (GDX) , caught plenty of flack during its 54% 2013 plunge.
Things have been better to start 2014. Heading into Monday’s session, GDX was up 4.2% for the year, o 60 basis points better than the SPDR Gold Shares (GLD) , but volatile mining ETFs can taketh what they giveth in rapid fashion so it is not surprising that some market participants are approaching mining funds with skepticism. [Moody's Pares Forecasts on Gold, Silver]
Gold miners “have historically been vehicles for the corporations’ management to steal money from shareholders. They do this buy granting more stock for management and then they sell it to you. You will no doubt give me all sorts of arguments against that view. You are entitled to your view and I will read your well thought out comments to discern whether there are any facts that dispel my thinking. They are not a proxy for gold and never will be though,” opines Gregory Harmon of Dragonfly Capital.
Harmon is correct about at least one thing: Miners are not always the most accurate proxy for gold. For example, in 2008, 2011 and 2012, GDX traded lower while GLD rose. Last year’s 54% loss for GDX was nearly twice as bad as the 28.3% loss suffered by GLD. Harmon, perhaps somewhat humorously and certainly quite boldly proclaims those using mining stocks or an ETF like GDX to play a turnaround in bullion to be “lunatics.”
No one wants to be called a lunatic, but the fact is spot gold finished lower in 2013 for the first time 13 years. GDX has declined in four of the past six years. [Below $1,250 an Ounce, Gold Miners Could be in Trouble]
“What would it take for the miners to reverse higher? History says a sustained move higher in gold. But the down trend in gold is no where near run its course. Even the most optimistic goldbug can only make a case that the fall has stopped, not a for a reversal. So why is it that you want to buy the gold miners?,” wrote Harmon.
To be fair, GDX is higher by nearly 2% Monday after Goldcorp (GG) announced it will acquire Osisko Mining for $2.4 billion. Goldcorp is GDX’s second-largest holding with a weight of 12.9%.
Market Vectors Gold Miners ETF
Tom Lydon’s clients own shares of GLD.
- Commodity Markets
- SPDR Gold Shares