gold-mine

Market Vectors Gold Miners ETF (GDX) Outperforms

April 29th, 2016 by

As the door closes on the month of April, there’s been a great deal of action in the gold mining space. The sector got even more support when gold prices rose again on Friday, the last trading session of April.

Below we explore why gold mining stocks and especially exchange-traded funds tracking these miners tend to outperform during rallies for the precious metals. However, always keep in mind that these are clearly “gold equities,” little different from shares of public stock, and present a significant risk that is rather opposite to the safe haven provided by physical bullion.

GDX On the Rise

The numbers don’t like for the Market Vectors Gold Miners ETF (GDX). Year-to-date, this fund has advanced an impressive 60%. By comparison, the bellwether SPDR Gold Shares ETF (GLD) has “only” gained 15% over that period. You can see the year-to-date (YTD) comparisons in the chart below.

GDX vs GLD

One wonders, why has GDX diverged from GLD? As glaring as the four-to-one return ratio is, the explanation reveals that this kind of divergence is not particularly uncommon. (It’s worth noting that since the beginning of February, the ratio of returns between GDX and GLD is even wider at 5.5:1.)

One tried-and-true dynamic of the trading markets is that producers of a commodity typically outperform that underlying commodity during an upswing. This is because these companies are structured through financial instruments in ways that leverage the raw commodity itself. Market Realist explains, “Depending on [their] holdings at any particular time, then, the operational and financial leverage of those holdings have a great bearing on the performance” of equities.

gold-mineThis trend is compounded in an ETF like GDX because it is made up of a basket of major and intermediate mining firms. For instance, the three big firms Goldcorp (GG), Newmont Mining (NEM), and Barrick Gold (ABX) comprise roughly a quarter of GDX’s total holdings.

It helps that the precious metals in general have been rising. In the month of April alone, silver prices surged better than 17%. However, since most producers don’t operate primary silver mines, a play on gold miners amid rising metal prices is far more straightforward.

Over the course of this week alone, GDX has added over 10% and has experienced significant trading volumes—as high as 20 million shares changing hands with an average in seven-figures. Another sign of this fund’s increasing momentum is the fact that more than half of its outstanding shares are owned by institutional investors (hedge funds, money managers, etc.). This has ballooned the market capitalization of GDX to over $7.6 billion. The fund gained another 3.8% early on Friday morning, pushing prices above $25 per share.

Evaluating Risk

As acknowledged earlier, there is a great deal of risk associated with ETFs, especially leveraged ETFs. An example is the Dirextion Shares ETF Trust (NUGT). This fund basically returns 3x the Gold Miners Index that GDX tracks. Accordingly, NUGT is up over 200% YTD—tripling in value.

Although gold mining stocks are not a hedge against risk like physical metals, investors looking for big short-term returns from their portfolio can make a play with mining ETFs while still balancing risk by holding physical gold for the long run.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.