Usually, gold miners trade as a leveraged play on underlying precious metals. This means that when gold prices are slumping, gold miners are really hurting, as they tend to experience more extreme losses than their bullion cousins.
This trend has certainly taken place for much of 2013 as top gold mining ETFs have fallen by about 50% YTD, compared to losses of roughly 25% for the underlying metal, as represented by products like GLD or IAU. However, the opposite is also true; when gold prices are rising, gold miners tend to be leading the pack higher to a large degree (see 5 ETFs Surging on Bernanke’s Dovish Comments).
Gold miners were definitely leading gold bullion higher in Tuesday trading, as top gold mining ETFs like GDX and GDXJ saw gains in excess of 3% on the session. This was a pretty huge performance considering that GLD and IAU only posted gains of about 0.5% on the day.
Clearly, this was a case of gold miners acting as a leveraged play on the underlying metal. Still, this was a pretty big jump considering gold’s relatively flat move, suggesting that other factors may have been at play in the gold mining market.
Possible Reason for gold mining ETF surge
Some are citing the idea that many gold miners and analysts of the space were originally anticipating gold around the $1,000/oz. level for most of their projections. Now that it appears as though gold will hold well above that, expectations are going to have to be raised across the board for both revenues and profits for these companies.
Basically, some are beginning to think that the incredible sell-off in the gold mining space has been extremely overdone, and that the segment lost more based on gold’s slump than what was probably necessary.
So now investors are starting to trend back into this space, bidding up names that have become unloved but still have extremely low PEs and could very well be bargains at current prices should gold stabilize (also see 4 Ways to Short Gold with ETFs).
If you believe this trend is the case going forward in this volatile space, it is worth noting that there are a number of gold mining ETFs currently on the market that could be solid choices. While there are some specialized—but thinly traded—options like GGGG and GLDX, we have briefly highlighted two of the most popular choices in the space, either of which could be interesting picks for investors seeking to get in on the sector’s sudden upswing:
Market Vectors Gold Miners ETF (GDX)
This is the most popular gold miner ETF on the market, with close to $6 billion under management. Volume is also quite good, coming in at 22 million shares a day suggesting that it is a pretty heavily traded product.
The fund has a large cap focus, holding just 30 companies in its basket in total. Canadian firms account for roughly two-thirds of the assets, followed by the U.S. and South Africa to round out the top three (read The Comprehensive Guide to Gold ETF Investing).
The product does have some concentration issues though, as it allocates nearly one-third of its assets to the three biggest holdings. These include two Canada based firms and one U.S. company; Goldcorp (GG), Barrick Gold (ABX), and Newmont Mining (NEM).
The fund is down about 48.4% so far in 2013, though it is up 4.3% in today’s session and roughly 9.3% in the past five days thanks to some positive sentiment about the space.
Market Vectors Junior Gold Miners ETF (GDXJ)
For investors seeking a more volatile play on gold miners that has a focus on small cap securities, GDXJ is a solid choice. The ETF is also relatively popular, with assets under management of $1.2 billion and average daily volume of just over one million shares a day.
The ETF is roughly evenly split among small and micro cap securities, holding about 75 securities in its portfolio. Once again, Canadian firms take the lion’s share, though Australia (23%) and the U.S. (9%), round out the top three.
This ETF is also much more spread out than its counterpart, allocating no more than 5% to any single security. Still, due to its focus on small caps, it is generally prone to big moves, especially when compared to peer funds.
GDXJ is down roughly 54% in the year-to-date time frame, while it has added about 2.9% today, and 10% in the past week thanks to the surge in interest regarding gold mining stocks (also see Time to Buy the Covered Call Silver and Gold ETFs?).
It has been a pretty brutal year for gold and gold mining stocks. Losses have hit over 25% for gold bullion, while gold miners have lost over 50% YTD in some cases.
However, there is growing concern that these steep losses may have been too much in the gold mining space, especially if gold prices maintain their current levels. That is why many gold mining stocks and ETFs were bid up in Tuesday trading, and could continue to trend higher in the weeks ahead if the bearishness over gold finally appears to be over.
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