In a year of jaw-dropping declines for gold and silver mining exchange traded funds, investors have not just stood by these funds, they have continually allocated fresh capital to the these ETFs.
In particular, the inflows to gold mining ETFs not only buck the trend of price retrenchment, but that of billions of dollars of outflows from physically-backed gold ETFs. Two such funds rank among the 10 worst ETFs in terms of 2013 outflows and some market observers believe it is ETF selling that has exacerbated spot gold’s woes this year. [Inflows Buck Mining ETFs’ Declines]
How long investors are willing to stand by slumping ETFs such as the Market Vectors Gold Miners ETF (NYSEArca: GDX) and Global X Silvers Miners ETF (NYSEArca: SIL) could be debated and just because those ETFs are each down more than 52% this year. [Negative Sentiment Rising for Mining ETFs]
With nearly every other corner of the U.S. equity market in rally-mode, investors and money managers looking to lock-in profits before year-end are also looking to do some tax-loss harvesting to offset tax tabs on profitable trades. Selling slumping mining ETFs is seen as one way of accomplishing that objective.
“What in their portfolios have declined to offset the gains? Gold stocks,” said Malcolm Gissen of Encompass Funds in an interview with Myra Saefong of MarketWatch. “The miners are suffering largely because of tax-loss selling.”
Gissen added Encompass sold gold stocks early this year and has not bought any as prices have tumbled over the course of 2013. Even with those declines, analysts are mostly bearish on mining stocks. Some observers have even speculated traders with exposure to mining stocks could be hit with margin calls, causing further declines.
GDX now resides at five-year lows while SIL hovers near its lowest prices since its April 2010 debut. Conversely, the Direxion Daily Gold Miners Bear 3X Shares (NYSEArca: DUST) is this year’s best leveraged ETF although investors have pulled capital from that fund. [Top-10 Leveraged ETFs of 2013]
Investors with fortitude and patience to wade into the mining sector should do so with large producers that have ample resources and are increasing production, Gissen told MarketWatch. Those names include Goldcorp (NYSE: GG) and Yamana (NYSE: AUY). Goldcorp is GDX’s largest holding with a weight of 11.7%. Yamana accounts for almost 5% of the ETF. At just under $856 an ounce, Yamana has one of the lowest all-in cash costs among GDX holdings.
Market Vectors Gold Miners ETF
ETF Trends editorial team contributed to this post.
