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ETF BFFs: Gold Miners and the Yen


There are currencies that are referred to as “commodity currencies” such as the Canadian dollar for its perceived correlation to oil prices and the South African rand for its relationship to precious metals. However, an interesting relationship between one of the most heavily trade currencies and one of the most embattled commodities has emerged in recent weeks and it is not one many traders would have thought of a few months ago.

Japan is not a major gold producer, but a sudden burst of strength out of the yen is lending a helping hand to gold and that help could not come at a better time for the yellow metal. Gold exchange traded products saw $5.7 billion in outflows last month, bringing year-to-date redemptions to $23.9 billion, according to a BlackRock research note. Total gold ETP assets now sit at $96.2 billion, or 31.9% lower from the $141.2 billion at the end of 2012. [Six Months of Gold ETF Outflows]

Since May 20, the SPDR Gold Shares (GLD) , the world’s largest physically-backed gold ETF, has traded flat, but that is an improvement over previous weeks. Over the same time, the CurrencyShares Japanese Yen Trust (FXY) has jumped 5.2%, including a Thursday gain of 2.2% on nearly 8.3 times the ETFs average daily volume. [Yen ETFs Tumble as Dollar Breaks 100 Yen]

Alright, so GLD and related ETFs are not yet seeing a significant yen-induced bounce, but some of this year’s most downtrodden sector ETFs are getting a boost from the Japanese currency: Gold miners ETFs. While FXY has soared 5.2% in the past 13 trading days, the Market Vectors Gold Miners ETF (GDX) is up 8%. [Gold Miner ETFs Bouncing on Heavy Volume]

GDX’s small-cap cousin, the Market Vectors Junior Gold Miners ETF (GDXJ) has soared 11% over the same time. Part of the reason gold miners are benefiting from the strengthening yen could be the unwinding of the risky carry trade, the scenario where traders sell short a low yielding currency such as the yen and use the proceeds to buy a higher yielding currency such as the Australian dollar.

The yen carry trade “became overcrowded over the last few months as the Japanese have purposefully weakened their currency in a last ditch effort to revitalize their economy. It hasn’t worked,” writes Anthony Mirhaydari for MSN Money.

For now, GDX, GDXJ and friends are loving the unwinding of the carry trade.

Market Vectors Gold Miners ETF

ETF Trends editorial team contributed to this report. Tom Lydon’s clients own shares of GLD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.