Gold Miners Have Catching Up to Do: An ETF to Play the Weakness

Strong fundamental indicators like low debt and higher dividends should translate to higher value, but that hasn’t been the case with gold miners.

Kitco News recently reported that a Metals Focus report showed that valuations for miners seems to be following the current trend in gold prices in 2021: down.

“According to a report by Metals Focus, a leading independent precious metals research consultancy, the major gold miners’ valuations remain low despite falling debt and rising dividends,” the report said. “In its recent study, Metals Focus found that net debt for the peer group has fallen from a peak of US$32bn in 2013 to its present level of US$6bn. Improved margins, thanks also to a rising gold price, has allowed companies to boost dividends and in some cases start share buy-back programs, the consultancy pointed out.”

Looking at the chart of gold prices juxtaposed with the NYSE Arca Gold Miners Index, both are heading in a downtrend towards the end of the year. The index is taking the brunt of the blow, falling 18% year-to-date compared to gold’s 7%.

What’s to blame? Three primary culprits: a decline in production, inflation, and environmental factors.

“Production for the peer group has been falling consistently, by about 8% since 2014. With the emphasis on cash flow, following the end of the last gold bull market in 2012, gold mining companies cut exploration spend, and all forms of capex to a minimum, as well as trimming on-going cash costs,” Metals Focus said.Gold Price in US Dollars Chart

A Bearish Leveraged Play on Miners

Traders erring on the side of bearishness can opt to play the weakness via the Direxion Daily Gold Miners Index Bear 2X Shares (DUST). Rather than using a margin account to short stocks, a leveraged ETF can allow traders to utilize a short position with one fund.

DUST seeks daily investment results before fees and expenses of 200% of the inverse of the daily performance of the NYSE Arca Gold Miners Index. The fund invests in swap agreements, futures contracts, short positions, or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index equal to at least 80% of the fund’s net assets.

The index is a modified market capitalization weighted index comprised of publicly traded companies that operate globally in both developed and emerging markets and are involved primarily in mining for gold and, to a lesser extent, silver.

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