A gold miner exchange traded fund issued new shares in what appeared to be a bullish turn for the beleaguered sector, but in reality, the new issuances fueled an influx in short selling.
The Market Vectors Gold Miners ETF (GDX) saw a surge in new shares as market makers created shares to lend out to short sellers, reports Chris Dieterich for the Wall Street Journal. [Gold vs. Gold Miner ETFs: Is the Divergence Finally Over?]
Market makers, or authorized participants, can create or redeem shares of an ETF by exchanging them for a basket of securities from the underlying benchmark.
“Investors are typically going to look at the net assets and flows to gain a sense…if there is smart money moving in,” Todd Rosenbluth, director of ETF research at S&P Capital IQ, said in the article. “In certain cases, that will lead you down the wrong path.”
Gold prices plunged after April 15, but that did not stop GDX market makers from creating 11.8 million shares to 207.2 million by April 17, the highest level of shares outstanding so far this year.
Meanwhile, GDX shares loaned to short sellers jumped to 9.2 million, or almost triple the amount on loan at the beginning of April. Short-sellers would borrow the shares to sell at a high price and repurchase them at a lower price in the future to generate a profit, betting on declining prices. [Gold Miner ETFs: When Will Sentiment Turn on Most-Hated Sector?]
Over the past seven sessions, GDX has lost over $300 in assets and saw shares outstanding shrink by 10 million.
Market Vectors Gold Miners ETF
For more information on gold stocks, visit our gold miners category.
Max Chen contributed to this article.
- Gold prices