Many investors are drawn to the ease with which they can gain exposure to alternative investments through ETFs, or exchange-traded funds. This is especially true in the commodities markets because of the high risk and volatility associated with investing in raw commodities. One way for investors to avoid the risk of “naked” positions in commodities futures is to choose ETFs, which not only offer easier access to these markets but also help hedge against such risk by bundling together diversified holdings.
Even these risk-mitigating features of ETFs haven’t helped the Market Vector Gold Miners ETF (NYSE:GDX) this year, however.
Surviving a Rough Year
So far this year, GDX has lost 25% of its value.
The recent FOMC meeting didn’t have much of an impact on gold prices. The somewhat hawkish tone of the meeting minutes was expected to help lift the dollar, which is usually a negative development for the precious metals. This did not happen, however.
Aside from the dollar and metals prices, mining stocks like GDX have struggled for other reasons, as well. According to Motley Fool last week:
“Yet even apart from gold prices, operational challenges have hit the mining sector hard as well, and even during periods when metals prices have risen, those internal problems can hold back gold-mining stocks. With many investors fearful of the macroeconomic impact of future monetary policy moves on the precious metals markets, gold mining stocks aren’t in a strong position.”
Components of GDX
Here are the major mining firms that make up the biggest portion of the GDX basket, along with their respective percentages as part of the fund’s makeup of assets.
Goldcorp Inc (NYSE:GG; TSX, SWX:G) = 7.12%
Newmont Mining Corp (NYSE, SWX:NEM; TSX:NMC) = 6.87%
Barrick Gold Corp (NYSE, TSX, SWX:ABX) = 5.95%
Franco-Nevada Corp (NYSE, TSX:FNV) = 5.52%
Agnico Eagle Mines Ltd (NYSE, TSX, SWX:AEM) = 5.49%
Silver Wheaton Corp (NYSE, TSX, SWX:SLW) = 5.11%
Newcrest Mining Ltd (ASX, SWX:NCM; TSX:NM) = 5.03%
Randgold Resources Ltd (NASDAQ:GOLD; LON:RRS) = 5.02%
AngloGold Ashanti Ltd (NYSE:AU) = 4.37%
Royal Gold Inc. (NASDAQ:RGLD; TSX:RGL) = 4.24%
Despite the dismal outlook less than a week ago, recent surges in the prices of the precious metals being mined have helped lift the various gold mining ETFs. GDX rallied 3.6% on Friday, while the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ), which tracks the smaller mining companies, gained 2.8% on the day. The other main mining ETF, the Direxion Shares ETF Trust (NYSE:NUGT), fared even better, posting a 10.5% gain. NUGT is 3 times more highly leveraged than its counterpart GDX, which explains the larger movement.
For some analysts, the expected drop-off for the precious metals following next month’s potential rate hike from the Federal Reserve is being overblown. It seems reasonable that the sharp losses for the metals in October was already sufficient to bring prices down to their appropriate post-hike levels. This means that gold is unlikely to sink very far following the December FOMC meeting—even if the Fed decides to raise rates. That means a lot of traders will be forced to cover shorts when the time comes. This would imply that gold investors shouldn’t be too quick to shun GDX or its counterparts in the ETF market.
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.