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Investors Like GDX Despite Performance

Cinthia Murphy

The Market Vectors Gold Miners ETF ( GDX | A-54 ) has now slipped some 50 percent so far this year in a performance that puts it among some of the worst-performing ETFs in 2013, yet investors continue to pour assets into the fund in what most likely amounts to unwavering institutional appetite for their favorite proxy for gold, as well as spillover demand from investors getting out of SPDR Gold Trust ( GLD | A-100 ).

Since the beginning of the year, a net of $2.25 billion has flowed into GDX, and in only four months did the fund see net asset outflows so far this year, according to data compiled by IndexUniverse. Meanwhile, GLD—the largest physical gold ETF—has seen net asset outflows every single month this year—sometimes as little as $636 million in a month, sometimes as big as $6.77 billion in monthly outflows, as was the case last April. In all, the fund has now bled $21.56 billion year-to-date, without showing signs of stopping.

There’s no question that the gold market has been under a lot of pressure recently, and gold prices are now down 24 percent year-to-date—and much of that decline has been directly linked to ETF redemptions . That weakness has come while the U.S. stock market, as measured by the S'P 500, has rallied nearly 20 percent in the same period.

But that doesn’t mean that investors’ appetite for some form of exposure to gold is completely gone. In fact, it seems fair to say that funds like GDX are likely capturing some of that displaced GLD investor base, especially because gold miner funds like GDX, from a technical perspective, look particularly attractive at current low levels, IndexUniverse head of research Dave Nadig said.

GDX comprises some 36 U.S.-listed gold miner stocks, and is the most popular gold miner ETF in the market today, with $6.9 billion in total assets.

In general, institutional investors have for a long time relied heavily on gold miner stocks as a proxy for gold, as many of them are often prohibited from owning the yellow metal directly. That means the ongoing demand for funds like GDX is anything but new, Nadig said.

“It’s not surprising to see money flow out of physical gold and into gold miners from folks who want exposure to the space in general,” Nadig said. “Gold miners have been historically an institutional darling for that reason.”

Strong flows into GDX could also be linked to short-selling interest, even if remotely. The number of shares short on the fund remains relatively high, meaning some of the share creations seen this year could be linked to short interest.


Chart courtesy of StockCharts.com


To be clear, the short-interest ratio measures the prevailing sentiment the market has on a particular stock, and that number is used by investors to determine how long it would take short sellers, in days, to cover their entire positions if the price of a stock begins to rise.

In the case of GDX, that ratio is currently 0.34, or about 20 million shares any given day—about a third of the fund’s daily trading volume, according to data compiled by IndexUniverse.

Earlier this year, the short-interest ratio on GDX was as high as 1.21 in March, meaning it looks like it’s been trending lower, but that’s not the case relative to volume, which has been increasing significantly.

In fact, trading volumes in GDX are now multiples of what they were just a few months ago—in the 50 million to 60 million-share range on a daily basis now versus 10 million or so as recently as March. Meanwhile, the shares shorted on the fund have remained steady at around 20 million since March.

“While actual shares short in GDX are high, relative to interest in the ETF, that’s not surprising,” Nadig noted. “There’s some share creation for shorts going on, but it’s unlikely to be a big driver of flows.”

If that liquidity were to dry up, the short-interest ratio in GDX would likely shoot up.


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