Gold Mining ETFs: Contrarian Buys?

July 22nd at 8:00am by Tom Lydon

One of this year’s most embattled sector plays, gold miners and the ETFs those stocks call home, have been showing signs of life in recent weeks. Wary investors are no doubt wondering recent price action in ETFs such as the Market Vectors Gold Miners ETF (NYSEArca: GDX) is nothing more than a dead-cat bounce before the continuation of the recent bearish trend or a harbinger of more bullish things to come.

GDX, the largest gold miners ETF by assets, has gained almost 4% since the start of July and since July 8, the ETF has surged 13%. Showing that leveraged ETFs can work well when properly used as short-term traders, the Direxion Daily Gold Miners Bull 3X Shares (NYSEArca: NUGT) has soared 38% since July 8. [Gold Mining ETFs Bouncing on Fed News]

There has been plenty of chatter that gold miners are facing crimped profit margins due to bullion’s fall, but that may be overstated. The CRU Group, a research company in London, calculates that only about 2.5% of global output losses money if gold prices fall below $1,300 per ounce. [Gold Mining ETFs Could Generate Profits From Lower Bullion Prices]

It is the appearance of declining gold futures prices adversely impacting miners that so many investors and media outlets, but at least one industry observer views miners as contrarian plays.

“First, the growing mainstream negativity toward the gold stocks (after a 65 percent decline) is a textbook contrarian buy signal. It comes at a time when historical analysis suggests this is the best time to buy and when valuations are at multi-year lows. Second, one should consider the gold stocks a venture capital type of investment. Don’t buy the entire sector but look to buy specific stocks,” writes technical analyst Jordan Roy-Berne for Wall Street Cheat Sheet.

There is evidence to suggest that miners can offer value following precipitous declines such as the one recently endured by investors. At is 2008 peak, GDX was trading over $56, but had tumbled below $18 by October of that year. The ETF proceeded to double by May 2009. Even if that trade is taken out of the equation because a broader market bounce encouraged by the end of the financial crisis, there have been other stellar trades in GDX’s history.

At its July 2009 trough, GDX labored $35 before topping $50 in November of that year. GDX’s most recent peak at around $55 in September 2012 was reached after the fund traded under $42 just two months earlier. [De-Rating for Miner: Done or More to Come?]

Although GDX and rival funds have rallied hard and fast this month, implying the move may already be close to ending, it is worth noting that GDX is trading just 3.3% below its 50-day moving average. A a move above that line could encourage more buyers to step in.

Market Vectors Gold Miners ETF

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of NUGT.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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