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Inside the Collapse of Gold Mining ETFs - ETF News And Commentary--THE 16th GUANGZHOU INTERNATIONALPLATEMETAL, BAR, WIRE, METAL PROCESSING & SETTING EQUIPMENT EXHIBITION
3/11/2015 plate metal expo-wire expo |
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It has been long since gold prices saw a shining stretch. The metal delivered massive negative returns for two consecutive years in 2014 and might unfortunately see a brutal stretch this year too (read: Any Hope for a Gold and Oil ETF Rebound in 2015?).
It is not only one event that is playing foul against the gold market. A combination of factors – the Federal Reserve’s close of the QE policy in 2014, rising rates speculation on the wave of strong U.S. economic numbers, a multi-year high greenback and slowdown in Chinese demand – weighed on gold prices. The drop has technically pushed the yellow metal into a swamp.
Though the yellow metal had a shining start to 2015 due to a spike in volatility emanating from multi-year low oil prices and overall global growth worries, the U.S. economic growth could mar the metal single handedly.
Inside the Slump
The latest blow to gold was the sturdy February job data. Notably, the U.S. economy generated a total of 297K jobs in February versus estimates of 240K and the prior month’s tally of 239K. The jobless rate slipped to 5.5% from 5.7% recorded in the prior month and from 6.7% in the year-ago month.
This paired with the roll out of QE in the Euro zone and ongoing easing in Japan which took the U.S. dollar to an 11-year high against a basket of currencies. This in turn troubled commodity investing, including investing in gold. After all, if the Fed hikes rates, why would investors put their money in non-interest bearing assets like gold (read: Bet on Euro-Dollar Parity with These ETFs)?
Thanks to these issues, SPDR Gold Shares (GLD) has lost about 2.6% (as of March 9, 2015) since the release of the job report last week while the largest big-cap gold mining ETF Market Vectors Gold Miners ETF (GDX) has plunged about 10.8% during the same frame. The latter put up with more pain as it often trades as a leveraged play on gold.
With most economies chugging along a steady track, albeit slowly, the appeal for safe haven investing appears to be losing ground. Moreover, a sustained oil price slump lowered the inflationary outlook globally which in turn marred the need for inflation-hedged investing. As a result, gold, widely viewed as a safe bid and inflation-protected asset, is being forced to offer such lackluster returns (read: A Strong Start to Safe Haven ETFs in 2015).
If this was not enough, the sought-after brokerage house UBS recently cut its one and three month price forecasts for this precious metal. UBS has now slashed its one-month price target for gold to $1,200 per ounce from $1,240, and its three-month target from $1,200 to $1,170 per ounce.
ETF Impact
Due to its leveraged nature, sell-offs were unquestionably worse in the gold mining space than it was in the bullion segment. Many of these equity products fared even worse in the latest sessions, losing double digits in most cases.
Below we have highlighted some of the biggest gold mining ETFs and how they performed in the key session:
Market Vectors Gold Miners ETF (GDX) – down 10.8%
Market Vectors Junior Gold Miners Fund (GDXJ) – down 12.1%
PowerShares Global Gold and Precious Metals Portfolio (PSAU) – down 10.7%
Global X Gold Explorers ETF (GLDX) – down 8.6%
iShares MSCI Global Gold Miners ETF (RING) – down 11.2%
Bottom Line
In a nutshell, this has been an extremely rough stretch for gold mining ETF investors, with most products losing double digits in just two sessions. And given the broad-based surrender in the space, once can easily sense a falling trend in these products in the near term.
However, risk-tolerant investors can consider riding out gold mining ETFs on their dips and do some bottom fishing, definitely with a long-term view. Investors should note that much of the rising rate as well as rising dollar concerns in the U.S. are factored in by now. This leaves less scope for bullion and the miners to underperform.
Moreover, easing in policy measures in China might release tensions over its gold consumption.
Erratic geopolitics will also be there to support the metal (read: Will Gold Miner ETFs Dig Up Solid Returns in 2015?).
Whatever the case, great caution needs to be exercised when investing in this space, as the metal and mining ETFs tracking the segment are experiencing excessive volatility, suggesting that we could see more wild trading ahead.
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-THE 16th GUANGZHOU INTERNATIONALPLATEMETAL, BAR, WIRE, METAL PROCESSING & SETTING EQUIPMENT EXHIBITION
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