Many of this year’s best-performing exchange traded funds track gold mining equities, a group that includes the VanEck Vectors Gold Miners ETF (NYSEArca: GDX) and the VanEck Vectors Gold Miners ETF (NYSEArca: GDXJ), the two largest gold miners ETFs.
As has been previously documented, most of the best-performing non-leveraged ETF this year are gold and silver miners ETFs, a group that includes GDX and GDXJ. The rapid rise of these ETFs and their rivals has some market observers questioning whether near-term pullbacks are looming.
Related: 4 Gold ETFs to Diversify a Multi-Functional Portfolio
Of course, what is good for GDX and GDXJ is excellent for the Direxion Daily Gold Miners Bull 3X Shares (NYSEArca: NUGT) and the Direxion Daily Junior Gold Miners Index Bull 3X Shares (NYSEArca: JNUG). However, investors might want to apply some caution to these ETFs over the near-term.
[related_stories]“Short-term trades are just that — short-term — and smart traders try to lock in their gains before they’re gone. That’s not just the case in leveraged instruments, but plain, straight-forward gold trades as well. All of that creates selling pressure that helps swing leveraged funds like JNUG and NUGT to the downside,” according to InvestorPlace.
Strategists point out that costs keep rising, which has narrowed profit margins among gold miners. Recent mine closures have not improved margins. Current mining operations are also facing deteriorating ore grades. The recent decline in energy prices and depreciating currencies where local miners operate have also had minimal beneficial impact on cash costs.
Related: Be Careful With Miners ETFs
Gold miners currently trade at about a 59% discount to gold prices since 2009, have a price-to-book value of 1.0x and an average dividend yield of 2.8%, which makes the sector look attractive from a valuation standpoint. Moreover, U.S. economic weakness and speculation of the Federal Reserve pushing back on another interest rate hike have contributed to a depreciating U.S. dollar, which has also helped support USD-denominated gold bullion. Consequently, a weaker USD makes alternative assets like metals more attractive.
Gold assets look more attractive in a low interest rate environment as the precious metal is more competitive against assets that pay low interest, like bonds. Additionally, if the Fed holds off on further rate hikes, it would suggests the economy is not as strong, which would also help gold attract safe-haven demand.
To that end, traders and investors mulling any of the aforementioned ETFs should monitor the dollar’s gyrations and news regarding interest rates. On that front, signs are encouraging because the most recent employment data indicate the Fed may not be able raise rates this month.
For more news and strategy on the Gold market, visit our Gold category.
Direxion Daily Gold Miners Bull 3X Shares
