With the Market Vectors Gold Miners ETF (NYSEArca: GDX) and the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) down 11.1% and 20.5%, respectively, year-to-date, it is not unreasonable to think investors in the two popular ETFs are hoping for a gold miners Santa Claus rally.
There are signs that wish may be granted. For example, despite lingering weakness in gold futures and ETFs such as the SPDR Gold Shares (NYSEArca: GLD), that has not been enough to compel gold miners to increase hedging. Miners hedge production to lock in current prices for future output and the lack of recent hedging could be a sign that the companies extracting gold from the earth do not expect the yellow metal to fall much further.
“Gold miners are still not hedging their future production despite the recent price-drop to new 4.5-year lows, says the latest expert analysis, as zero interest rates and falling energy prices are deterring forward sales to lock in current prices,” reports Bullion Vault.
Adding to the long gold miners thesis are some bullish technical signs, including GDX’s relative momentum perking up even as the ETF recently made new lows, notes Chris Kimble of Kimble Charting Solutions. That could be a sign of bullish divergence that could give way to positive price action.
Chart Courtesy: Kimble Charting Solutions
There are also slight signs emerging that the GDXJ/GDX ratio is turning for the better. When the GDXJ/GDX ratio is falling, the former is weakening even more rapidly than the latter. That is to say given the volatility inherent in the junior miners, if the group takes a leadership role in boosting the broader gold miners complex, the effect would likely trickle down to GDX as well.
The GDXJ/GDX ratio does not command the same attention as other financial market ratios, but lack of popularity does not diminish the ratio’s potency. If the GDXJ/GDX ratio is successful in establishing support and then breaking out, it would be a positive sign for both ETFs, particularly if GDXJ legitimately leads its senior counterpart higher. [Comparing Two Gold Miners ETFs for Big Results]
Chart Courtesy: Kimble Charting Solutions
At the fundamental level, gold miners should also start to see some bottom line benefit from lower oil prices. Barrick Gold (NYSE: ABX), the world’s largest gold miner and the second-largest holding in GDX at 11% of the ETF’s weight, could save up to $25 per ounce of gold produced thanks to lower diesel prices, according to Bullion Vault.
Tom Lydon’s clients own shares of GLD.