The VanEck Vectors Gold Miners ETF (NYSEArca: GDXJ), once one of this year’s best-performing non-leveraged exchange traded funds, is in the midst of a precipitous decline. Over the past month, GDXJ, the second-largest gold miners ETF, is off 12.5%, leaving traders and technical analysts to ponder when a the ETF will put in a proper bottom and move higher again.
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. With many investors believing the Federal Reserve is moving toward a December rate hike, precious metals and the related equities have recently been under pressure.
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Leveraged answers to GDXJ include the Direxion Daily Gold Miners Bull 3X Shares (NYSEArca: NUGT) and the Direxion Daily Junior Gold Miners Index Bull 3X Shares (NYSEArca: JNUG).
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.
“The number of financings for the junior exploration companies has suddenly and sharply dropped off a cliff as the mania that engulfed the space in the spring and summer has evaporated into nervousness and despair. Declining deal flow is normal into any correcting market but the severity of the plunge is bullish,” according to ETF Daily News.
There is at least one positive fundamental catalyst that potentially bodes well for gold miners ETFs going forward: Peak production of gold has likely come and gone, perhaps indicating that supply will dwindle, thereby boosting bullion prices.
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Said another way, during gold’s bear market, miners looked to improve their balance sheets by cutting production and selling assets. So even as gold prices surge, there is not a rush within the mining sector to immediately boost production.
“The Commitment of Traders report for tomorrow is going to see another sharp improvement as gold open interest has shrunk to 500,328, and that is down from 544,824 on October 4. This is the large Commercials unwinding their massive short position in gold futures and is normally a precursor for a reversal. However, it is not to be used as a timing tool as the unwinding can take weeks to play out,” adds ETF Daily News.
For more information on the Gold ETFs, visit our Gold category.