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After a Rocky Q1, What's Ahead for Gold Mining ETFs?

Eric Dutram

After a horrendous 2013 in which many gold mining ETFs lost as much as half of their value, 2014 started on a pretty positive note for the space. Broad market risks and some bargain hunting helped to boost securities in the sector, leading to huge gains in the first 2.5 months of the year.

In fact, the top gold mining ETF, the Market Vectors Gold Miners ETF (GDX), added more than 20% in the first ten weeks of the year, while other top gold mining funds such as the iShares MSCI Global Gold Miners ETF (RING), and the PowerShares Global Gold and Precious Metals Portfolio (PSAU) saw similarly strong performances as well. And then in the often-volatile junior gold mining space, represented by GDXJ, gains approached 30% for the same time period, easily crushing the broad S&P 500 in the time frame.

However, the past two weeks have been far less kind for the gold mining world as big losses have been seen in the time frame. Many funds are now approaching double digit losses for the past month, while most are barely maintaining a 10% gain from a YTD look (read Gold Mining ETF Investing 101).

What Happened?

Several issues conspired in the past few weeks to take the shine off of gold mining investments. First, worries over emerging markets definitely made some investors reconsider gold plays once more. Meanwhile, concerns over a full blown Ukrainian war have subsided, further dulling the appeal of the safe haven.

It also hasn’t helped that many equities have rallied in recent sessions, and especially so in the high flying biotech and social media sectors. These companies were beaten down, but have found a bit of momentum as of late, and this new found risk appetite has also made investors feel a little less bullish on gold and by extension, gold miners as well (see The Best Gold Mining ETF for 2014).

Q2 Outlook

Obviously this isn’t a great trend and some of the fundamentals are (once again) unfavorable to gold prices in the near term. A bit of profit taking—at least for short term traders—is also at play in this key market segment as well.

Fortunately for the gold bugs, there is a ray of hope, at least when you look at recent earnings estimate revisions for the space. The gold mining industry is currently just inside the top third in terms of Zacks Industry Ranks, and at time of writing, not a single company has a Zacks Rank #5 (Strong Sell) in the 38 stock group.

The segment has also been moving higher up the list as of late, with a number of companies seeing upgrades to their Zacks Ranks in just the past week. So, the upcoming earnings season might actually be pretty decent for the space, and it could help the segment to find its footing once more (see Inside 2013’s Best Gold ETF).

Bottom Line

The near term definitely looks rocky for the gold mining space, and the past few weeks have been very unfavorable for gold mining ETFs. Big losses have been seen, and this has all but erased the gains that investors saw in the first 2.5 months of the year.

However, the recent earnings estimate revision activity could be a ray of hope for those looking to a return to stock price increases in the space. These estimates are definitely moving in the right direction, and some strength might be seen again in gold mining ETFs in the near term though it will likely be a wild ride, and especially if emerging market woes or Russian concerns creep back into the picture.

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