Gold is one of this year's worst-performing assets and that is weighing on shares of companies that extract the yellow metal from the earth.
The largest exchange traded fund (ETF) backed by physical gold is off 9.26 percent year-to-date, but the NYSE Arca Gold Miners Index (GDMNTR) is overshooting that decline in significant fashion with a year-to-date loss of over 20 percent.
Gold has been hampered by rising U.S. interest rates, the stronger dollar and investors' refusal to embrace gold's safe-haven status during calamitous events, including the recent economic turmoil in Turkey. Data suggest investors in most regions have been departing physically-backed gold ETFs in recent months, a trend that is pressuring mining equities.
As has been seen during previous eras of gold weakness, some ambitious traders are nibbling at gold via leveraged gold ETFs, including the Direxion Daily Gold Miners Index Bull 3X Shares (NYSE: NUGT). NUGT attempts to deliver triple the daily returns of the aforementioned NYSE Arca Gold Miners Index.
Why It's Important
Without leverage, gold miners are a volatile asset class. The three-year standard deviation on the NYSE Arca Gold Miners is 36.53 percent, or more than triple the comparable metric on the S&P 500. Volatility is a double-edged sword with leveraged ETFs, including NUGT. It is nice on the way up, but destructive on the way, meaning NUGT is best deployed as an ultra-short-term trade.
Although it entered Thursday as one of Direxion's worst-performing leveraged bullish ETFs on a month-to-date basis, NUGT is luring traders. Over the past month, the king of leveraged gold miners ETFs is averaging daily inflows of $21.37 million, according to Direxion data.
That new capital is accompanied by higher volume. For the five days ended Aug. 22, NUGT's volume 38.50 percent above the trailing 20-day average.
Broadly speaking, miners could get a lift from news that output is slumping to multi-year lows around the world. As for NUGT, that long trade could be validated if the NYSE Arca Gold Miners Index reclaims its 50-day moving average, which the index resides almost 13.50 percent below.
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