Getting it Wrong With Dollar, Leveraged Gold ETF Flows

After a sustained period of weakness, and by “sustained period” it can be said that means nearly all of the current century, the U.S. dollar is showing notable signs of life.

Over the past month, the PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP) is up nearly 3%. Of course, dollar strength is a thorn in the side of commodities, including gold. UUP’s 3% move to the upside has played a big role in sending the SPDR Gold Shares (NYSEArca: GLD) and rival gold ETFs lower by nearly 5% over the past month. [Dollar Gain Equals Pain for Commodities ETFs]

What is interesting is that although the price action in UUP and GLD is, predictably, diverging, investors are simultaneously pulling capital from both ETFs. UUP has lost nearly $108 million over the past month, though that is a mere fraction of the $1 billion pulled from GLD. That scenario could be more the result of the U.S. Dollar Index, which UUP tracks, running into some multi-year resistance than investors not acknowledging that the greenback and gold typically move opposite of each other.

However, in a scenario that has played out during previous periods of gold weakness, some investors are dangerously getting things wrong with leveraged gold miners ETFs. The Market Vectors Gold Miners ETF (NYSEArca: GDX) and the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) combine for $8.8 billion in asset under management. GDX and GDXJ also sport average daily volume of over 30 million and over 8 million shares, respectively, so it is not a stretch to say these ETFs are popular with plenty of traders and investors. [Miners ETFs Look for Help]

GDX, GDXJ and a raft of other gold miners ETFs have taught investors an important lesson over the years: It is unlikely that these funds will rise as gold prices fall. Add to that, it is unlikely gold prices will rise in unison with the dollar.

Here is where flows data turn up some interesting anecdotes. Investors have been right to pull almost $63 million from GDX over the past month as the ETF has fallen nearly 15%. However, the Direxion Daily Gold Miners Bull 3X Shares (NYSEArca: NUGT) has added over $340 million during that period. Said another way, for every $1 that has left GDX, more than $5 has gone into NUGT, the triple-leveraged answer to GDX.

Only the Direxion Daily Junior Gold Miners Index Bull 3x Share (NYSEArca: JNUG) has been a worse performer than NUGT among Direxion’s triple-leveraged bull ETFs this month, according to issuer data. [Miners ETFs Try to Keep Cash]