gold bull

Market Vectors Gold Miners ETF (GDX) Rallies

February 24th, 2016 by

gold bullThere has been a vast turnaround in the market for ETFs (exchange-traded funds) that are backed by gold. This has been the opposite of the preceding three years that saw steep losses for funds like the SPDR Gold Trust (GLD), the Market Vectors Gold Miners ETF (GDX), the Direxion Shares ETF Trust (NUGT), and the iShares Gold Trust (IAU).

On both ends, GDX seems to have an amplified effect compared to its counterparts. The various gold mining stocks that make up the fund suffered the worst losses associated with the bottoming of the gold price; at the same time, GDX has outperformed the other exchange-traded products now that gold is back on the upswing.

To say the least, the gold bulls are back!

Major Turnaround

The difference between the consistent downtrend over the past several years and the performance of gold so far in 2016 is jarring. From its peak in 2011 to its low in late 2015, the gold price shed nearly 50% of its value (about 11% per year, annualized). In only 2 months thus far this year, the metal has risen an astounding 17%.

Among many other similar comments from big players in the financial markets, news that the megabank HSBC has changed its tune on gold has been making the rounds. The bank’s head of strategy in the foreign exchange (forex) markets, Daragh Maher, recently declared that the bear market in gold is officially over.

The stark differences between the gold market of the last few years and the new outlook for 2016 is shown in the gold ETF market. According to Bloomberg, “U.S.-listed ETFs backed by the precious metal reached $4 billion so far this month, heading for the biggest expansion since July 2011. That compares with $15.589 billion flowing out of international and domestic equities so far in February.”

Technical Perspective

Source: Bloomberg

Source: Bloomberg

Some technical chart analysts are pointing to the fact that the gold price has finally broken through a pair of key resistance levels around $1,200/oz and $1,230/oz. Although such analyses based on price charts can never be perfectly predictive, these key measures could signal a general trend reversal.

Going back three years, this is the first time the gold price has emerged above the downward channel (shown in green in the chart above) that has kept the string of losses bounded. Without going into too much detail, the important part of this chart is the way gold has quickly moved above both the red and yellow lines.

GDX Outperforms

While GLD is the most popular gold ETF, the most commonly traded gold miner’s ETFs are GDX and NUGT. Each of these funds have surged far beyond their regular counterparts. Rather than being backed by stockpiles of gold bullion, GDX is backed by the assets and financial health of the major mining firms. In this sense, the rebound for gold mining stocks has actually been even better than the performance of gold overall.

GDX 6-month price chart. Source: Financial-Market-News.com

GDX 6-month price chart. Source: Financial-Market-News.com

Short interest (bets on lower prices) in GDX have declined 14.7% from just a month ago, indicating that people are moving from shorts into long positions for these shares. Moreover, GDX has hit an even more important technical level than spot gold when looking a technical chart: the fund is now trading well above its 200-day moving average (green line above), which is also a strong sign of a positive trend reversal.

GDX 1-month price chart. Source: Google Finance

GDX 1-month price chart. Source: Google Finance

While most of the news about the gold price and gold ETFs has centered on spot prices and futures contracts, it’s worth noting that funds tracking gold miners have performed exceedingly well. Shares are up more than 40% in the past month alone, with over a 100 million shares changing hands in single trading sessions recently.

 

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.