After years of trailing gold price movements, precious metals miner ETFs could finally be forming a base as the funds begin to outpace the underlying commodity.
Market Vectors Gold Miners (NYSEArca: GDX) has gained nearly 8% over the past five days. The miner ETF jumped 5% Thursday to extend the previous session’s rally. GDX was the fourth-most active ETF on Thursday by share volume. Over 19 million shares had traded hands in midday action, compared with average daily volume of about 22.6 million.
Miner ETFs have been a falling knife that has cut off the fingers of a lot of traders trying to time a bottom in the embattled sector. GDX was down nearly 40% year to date heading into Thursday’s trade. Every rally has fizzled with the ETF dropping to new multiyear lows, so investors are naturally wondering if this latest bounce is the real thing.
“Precious-metals prices have declined sharply this year, threatening gold’s 12-year streak of higher prices,” Malcolm Gissen, co-manager of the Encompass Fund, said in a MarketWatch article. Gold and silver stocks have been “battered beyond rationality.”
Looking at technical analysis, the gold miner ETFs could be carving out a bullish inverse “head-and-shoulders” pattern, a reliable trend-reversal indicator. Also, technical analyst Chris Kimble at Kimble Charting Solutions notes that the most recent decline in GDX has driven the ETF down to a lower lower channel support line that has seen counter trend bounces over the past couple of years.
On a valuation basis, miners look cheap, with gold miners trading at an average price-to-earnings ratio of 11 and junior gold miners trading at a price-to-earnings of 9. Of course, miner ETFs have looked undervalued for several months yet they keep dropping.
“It is remarkable that there are junior companies that own gold deposits with positive economic studies that are selling for little more than their working capital,” Brent Cook, economic geologist and editor of Exploration Insights, said in the article. “There are some rather obvious dislocations out there.”
GDX, the large-cap miner ETF, has been stuck below its 50-day simple moving average since November 2012.
Market Vectors Gold Miners
Max Chen contributed to this article.