Yesterday we pointed out exchange traded funds in the metals and mining sector, and last week we highlighted ETFs that are based on the price of gold bullion. This presents a timely opportunity to discuss the correlation between the miners and spot gold itself, and how to potentially play these spreads using ETFs.
Over the past five year period, investors were better off owning spot gold via gold based ETFs such as IAU (iShares Gold) and GLD (SPDR Gold) instead of the related gold mining equities as measured by GDX (Market Vectors Gold Miners). [Gold ETFs Rake in Assets]
In the trailing five year period, gold has rallied 162.28% versus GDX up 42.07% during the same time period. Returns display a similar gap in the trailing one year period, with gold up 20.89% versus GDX down 7.49%, and year to date gold is up 21.23% with GDX losing 3.99%.
Over long periods of time, one can see a relatively high correlation between spot gold and the related miners, however they certainly do not trade in lockstep with each other. The historical “spread” can be likely be traded on with the adept use of products such as NUGT (Direxion Daily Gold Miners Bull 3X) and DUST (Direxion Daily Gold Miners Bear 3X) versus gold bullion based ETFs themselves such as IAU or GLD, with the daily leverage potentially adding opportunity for greater returns (albeit with greater risk), when the “spread” between the miners and spot gold widens against its historical band.
NUGT and DUST are both based on the same index as GDX, the NYSE ARCA Gold Miners Index, but the two products are designed to provide 3 times daily leveraged bull and bear exposure against the index.
Just to familiarize readers with the make-up of this index, top holdings currently are ABX (16.51%), GG (13.19%), NEM (11.18%), KGC (5.76%), and AU (5.60%), so 40% of the index is dominated by three equities at the moment.
Being still somewhat new to the marketplace, having debuted about one year ago in December of 2010, NUGT and DUST’s trading activity has significantly ticked up in the past several months, and eclipsing one million shares on several occasions daily as more sophisticated investment managers have adeptly used these products in conjunction with their bets on the prices of gold itself.
Direxion Daily Gold Miners Bear 3X
For more information on Street One ETF research and ETF trade execution/liquidity services, contact pweisbruch@streetonefinancial.com.
