With gold prices tumbling this year, gold mining equities and the related exchange traded funds are enduring significant punishment. This year, the loss incurred by the largest gold miners ETF is more than double that of the biggest physically-backed gold ETF.
Related: Top 34 Gold ETFs
That is to say being involved with leveraged miners funds, such as the Direxion Daily Junior Gold Miners Index Bull 3x Shares (NYSEArca: JNUG) and the Direxion Daily Gold Miners Bull 3X Shares (NYSEArca: NUGT) has been dangerous in 2018. However, some data points indicate risk-tolerant traders could soon see some benefits from leveraged mining funds.
“Although there is little evidence that inflation is accelerating (as of now) or that the end of this bull market is imminent, we argue that gold miners should be given a larger weight in investors’ portfolio for the following reasons: i) the economic cycle continues to mature; ii) asset valuation multiples are expanding and asset bubbles are emerging in certain areas; iii) budget deficits are increasing at alarming rates; and iv) quarterly earnings will face tougher comps in 2019, bringing into question how much longer this record-breaking bull market can continue,” said CFRA Research equity analyst Matthew Miller in a recent note.
CFRA is bullish on several of the largest names in the NYSE Arca Gold Miners Index, the benchmark NUGT attempts to deliver triple the daily returns of.
Important Data for Gold
Stock fundamentals like cost deflation across the mining industry, share valuations below long-term average and rising M&A are all supportive of the miners space as well, but those fundamentals could be glossed over if the dollar strengthens.
Related: Don’t Ignore Gold ETFs for a Diversified Investment Portfolio
Short covering has the potential to be a major catalyst for gold and the miners.
“For the week ending September 25, money managers increased their speculative gross long positions in Comex gold futures by 609 contracts to 98,513, while short positions increased by 1,823 contracts to 182,190. This means that gold’s net short position is 83,677 contracts,” according to Miller. “The gold market could be poised for a short-covering rally, as investors are likely to start closing out their record level of short positions, given gold’s resilience to not break below key levels of support.”
Data indicate traders have been adding money to the bullish JNUG and NUGT over the past month, but the bearish equivalents are drawing larger inflows.
For more information on the gold market, visit our gold category.