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Profit Out of Bleeding Gold Mining ETFs

Sanghamitra Saha

Lately, gold has lost its luster with its futures dropping the most in almost three years on October 4, amid rising bets over the Fed rate hike this year. Accompanying this was the speculation that the European Central Bank (ECB) may form a consensus to eventually scale back bond purchases earlier than its planned finish in March. The double whammy dealt a blow to overall gold investing.

U.S. Economy on a Roll

Investors should note that snapping the slump in August, American manufacturing activity grew in September with PMI rising to 51.5% (a reading of 50 or higher points to growth), up 2.1 percentage points from the August reading of 49.4% and above economists’ expectation of 50.6% (read: ETFs & Stocks to Play as U.S. Manufacturing Grows). 

Plus, the U.S. economy has been expanding at its quickest clip in two years, helped by solid consumer spending and decent business investment. After the final upward revision, GDP growth data for Q2 came in at 1.4%, following a 0.8% uptick in Q1.

All these fueled rate hike talks all over again to start Q4. Chances of a rate hike by December surged to 60% lately, as per futures data compiled by Bloomberg. This, along with the ECB’s possible wrapping up of bond buying program hinted at the finale of rock bottom interest rates era in the developed world. As a result, yield on the 10-year U.S. Treasury note increased 13 bps to 1.69% in the last three days (as of October 4, 2016).

Gold Mining ETFs Under Pressure

Gold delivered the best 1H performance in about four decades. But the prospect of rising rates boosted bond yields and the so-far-struggling greenback. As a result, the optimism surrounding gold investing, which bears no interest, has started to drain (read: First Fed Hike Put These ETFs in Focus).

Gold bullion ETFs SPDR Gold Shares GLD and iShares Gold Trust (IAU) were off 3.5% and 3.3% on October 4, 2016 (see all precious metal ETFs here). But the real blow was dealt to the gold mining sector with VanEck Vectors Gold Miners ETF GDX retreating about 9.9%, VanEck Vectors Junior Gold Miners ETF GDXJ being off 10.9%, iShares MSCI Global Gold Miners RING shedding about 9.6% and Sprott Gold Miners ETF SGDM plunging about 9.9% on October 4. In a nutshell, gold miners had a bloodbath yesterday.

How to Profit?

Investors can profit out of the recent bloodbath in the gold mining space by investing in inverse gold mining ETFs for outsized gains in a very short span of time (read: 5 Reasons Why Gold ETFs Can Regain Their Mojo).

Below, we highlight a few such ETFs that surged on October 4 and could be better options for investors with a strong stomach for risks.

Direxion Daily Junior Gold Miners Index Bear 3x Shares (JDST) – Up 31.3% on October 4

This fund seeks to deliver thrice the inverse performance of the MVIS Global Junior Gold Miners Index. The benchmark provides exposure to the small-cap companies that derive more than half of their revenues from gold or silver mining.

Direxion Daily Gold Miners Index Bear 3x Shares (DUST) – Up 29.4% on October 4

This product seeks to deliver thrice (3x or 300%) the inverse (opposite) daily performance of the NYSE Arca Gold Miners Index, which consists of global firms involving mainly in the exploration and production of gold.

ProShares UltraShort Gold Miners ETF (GDXS) – Up 19.7% on October 4

The fund provides twice (2x or 200%) the inverse return of the NYSE Arca Gold Miners Index.

Direxion Daily Gold Miners Bear 1X ETF (MELT) – Up 9.5% on October 4

The fund gives just the inverse exposure to the NYSE Arca Gold Miners Index.

Bottom Line

As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Still, for ETF investors who are bearish on gold for the near term, either of the above products could make an interesting choice (see: all Inverse Equity ETFs here).