The Market Vectors Gold Miners ETF (NYSEArca: GDX) is already in the midst of a run that would make any other ETF envious. After bottoming in early July, GDX has surged 29.6% since July 5.
Not only has GDX been soaring, investors have been pouring significant amounts of capital into the ETF. On August 20, Street One Financial’s Paul Weisbruch said “Recent inflows to GDX have raised its asset base now to $5.6 billion, despite poor performance in both the trailing one year and trailing five year periods.” At the start of trading Monday, GDX had $7.4 billion in assets under management. [Gold Miner ETF Pulls in $400M Amid Rally]
Considering the stellar move higher and impressive asset growth, it is not unreasonable to think that GDX and its high-flying rivals might be due for a near-term pullback. If gold prices continue cooperating, a pullback for mining stocks and ETFs may not be deep. In fact, if GDX clears horizontal resistance at $31, the fund could offer significant upside from there. [Small, But Mighty Gold Miners ETF Soars]
“Significant” as in the potential to double if the gold-to-gold miners ratio continues to decline. “The ratio of the price of gold to the price of GDX peaked at a record above 55 in June, before quickly falling to last trade near 46. As a group, gold miners have consistently underperformed the yellow metal since about 2007,” according to Hard Assets Investor.
As Hard Assets Investor notes, tumbling gold prices have forced some miners, including a few GDX constituents, to pare production. However, some industry observers have argued that lower production offers the opportunity for gold miners to streamline operations, which could boost profits. [Have Gold Miners ETFs Finally Hit Bottom?]
“A reversion to a gold/GDX ratio of 23—seen as recently as 2011—could lead to a doubling in the ETF, just based on current gold prices,” said Hard Assets Investor.
Even with its recent surge, GDX is still down 35% year-to-date. The last time the largest gold miners ETF posted an annual gain was in 2010 when it soared 33.9%. GDX lost an average of 12.5% in 2012 and 2011.
Market Vectors Gold Miners ETF
ETF Trends editorial team contributed to this post.
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.