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Value to be Found in Struggling Gold ETFs?

July 30th, 2015 by

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As one of the most popular means for investors to allocate some of their portfolio to gold exposure, the various gold ETFs are often used as a proxy for judging the status of the gold market at large, especially as a gauge of investor sentiment regarding the metal’s outlook. Moreover, since most ETF investors never take physical delivery of their metals, instead settling these contracts in cash, it’s much easier to bounce in and out of positions without incurring the costs of transport and storage.

Even though they don’t necessarily follow the gold price in lockstep because they are largely comprised of shares in gold mining and processing companies, these exchange-traded products haven’t been immune to the precipitous downturn for global commodities, underwhelming inflation, and falling gold prices that characterized the second quarter. In fact, the ease with which investors can close out ETF positions means that action in major gold ETFs like GDX, GLD, and GLTR often run ahead of movement in the spot price of gold, not the other way around.

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ETF Securities Precious Metals Basket Trust ETF (NYSE:GLTR) saw more than 3.5x its average volume in yesterday’s trading, when over 77,000 shares traded hands. GLTR has lost 6.4% in July, like most securities tied to commodities. Share prices have spent the week bouncing from dips below $55, as there seems to be strong support at this level. Though the downward slide for spot gold has forced many miners to shutter the windows until prices recover back above their cost to extract the metal from the ground, there are several large companies in gold mining that can remain profitable with gold as low as $800/oz.

Meantime, SPDR Gold Trust ETF (NYSE:GLD) set a new 52-week low barely above $100 earlier this week. Shares have dropped from over $112 at the beginning of the month, and volumes have increased as gold prices continued to fall; although the outlook remains bearish over the medium-term, the fund has some technical support to rise slightly in the near-term on bargain hunting. GLD is down over 0.75% this afternoon, pushing it just below $104 per share.

The Market Vectors Gold Mining ETF (NYSE:GDX), which includes a basket of gold mining stocks, is trading between 3% to 4% lower today to under $13.50/share as gold miners continue to feel the pain, even as the opportunity presents itself for contrarian support for gold with the bottom appearing to be in for spot prices. Yet, the fact that gold miners are still being hit harder may make them an even better bargain than other ways of increasing one’s exposure to gold. Unlike GLD and some other funds, GDX (like GLTR) holds physical gold in its portfolio rather than futures contracts.

Comparison of the most popular gold ETFs. Courtesy of Bloomberg.

Comparison of the most popular gold ETFs. Courtesy of Bloomberg.

Over the last month, while GLD and GLTR have largely tracked on top of one another, GDX has sunk much further. Commodities ETFs in general have been getting hammered as commodity-dependent economies in South America go into crisis amid the deflationary trend in global commodities prices. Shorts on paper gold are near record highs not seen in 2 years, and options on gold became net short for the first time since COMEX merged with NYMEX over 20 years ago.

The ostensible “capitulation” of the gold miners and gold mining interests as metal prices have tumbled lower is being taken as a sell signal by many analysts; however, in many regards, this could be taken with equal justification to mean that the bottom is truly in for gold prices, which would render many gold mining stocks (and therefore funds with exposure to these miners) more attractive at current prices. At minimum, the chances for a brief surge amid the bear market have improved the further that gold ETF prices have fallen.