It's Time To Assess Your Position In This 3x Leverage Gold Miners ETF

Jul. 7.14 | About: Direxion Daily (NUGT)

Summary

NUGT is not a suitable buy and hold vehicle.

Further gains are very possible, but risky. Take a look at my recommended hedging strategy.

The next best chance for a drastic increase in gold prices will come in early 2015.

Thesis: The Direxion Daily Gold Miner Bull 3x Shares (NYSEARCA:NUGT) is not a suitable buy and hold vehicle for the long-term gold investor. NUGT has crossed over its 200-day SMA, historically a negative indicator. Despite the recent surge in share price, further gains are very possible but risky. The next best chance for a drastic rise in gold prices, in my opinion, will come in early 2015.

Not a buy-and-hold vehicle

The chart above shows the trailing year's performance of NUGT and the index that it follows. Although the index is up 9.74%, NUGT is down 17.9%. This is a divergence of 27.64%. Given the fact NUGT is a 3x leverage ETF, the decay of value is disappointing. This proves that over long periods of time, NUGT is destined to lose value. Leveraged ETFs, especially 3x leveraged, are notorious for decaying value. You can read more here.

In the past month, NUGT has seen its share price increase over 56%. Great call by fellow contributor Brian Cellars. This proves that in short periods of time, the vehicle can have large price swings. Referring back to the above chart, there are several periods where a short-term buy-and-hold strategy would have produced good results.

Fundamentals

See below for NUGT's performance in relation to gold.

As we touched on briefly, NUGT follows the NYSE Arca Gold Miners Index. This is a basket of companies whose share price is based on their financial performance, right? Not quite. See below.

The NYSE Arca Gold Miners Index (also known as the AMEX Gold Miners Index) very closely follows the price of gold. We can infer that gold ultimately drives this index. However, there could be some exceptions. Most miners in this index are down significantly from their 52-week highs.

Below is a listing, as of 7/3/2014, of the companies included in the NYSE Arca Gold Miners Index.

Number

Security

Ticker

Country

Last Price

Previous Close

Price Change

New Shares

Weighting

1

GOLDCORP INC.

GG

CANADA

27.67

27.91

-0.85

813.191

13.56

2

BARRICK GOLD CORP.

ABX

CANADA

18.44

18.34

0.54

1164.67

12.94

3

NEWMONT MINING CORP.

NEM

U.S.

25.19

25.36

-0.67

498.529

7.57

4

SILVER WHEATON CORP.

SLW

CANADA

26.55

26.43

0.45

357.429

5.72

5

FRANCO-NEVADA CORP.

FNV US

CANADA

56.63

57.01

-0.66

147.207

5.02

6

RANDGOLD RESOURCES LTD-ADR

GOLD UQ

JERSEY

86.31

85.53

0.91

92.547

4.81

7

NEWCREST MINING LTD.

OTCPK:NCMGY, NCM AU

AUSTRALIA

10.33

10.18

1.42

766.511

4.77

8

AGNICO-EAGLE MINES LTD.

AEM

CANADA

38.29

38.82

-1.36

206.38

4.76

9

YAMANA GOLD INC.

AUY

CANADA

8.22

8.29

-0.84

869.666

4.31

10

ANGLOGOLD ASHANTI-SPON ADR

AU

SOUTH AFRICA

17.15

17.36

-1.2

404.895

4.18

11

ELDORADO GOLD CORP.

EGO

CANADA

7.53

7.62

-1.18

716.249

3.25

12

ROYAL GOLD INC.

RGLD

U.S.

76.19

76.23

-0.05

64.739

2.97

13

KINROSS GOLD CORP.

KGC

CANADA

4.25

4.29

-0.93

1144.383

2.93

14

CIA DE MINAS BUENAVENTUR-ADR

BVN

PERU

11.89

11.9

-0.08

275.635

1.97

15

NEW GOLD INC.

NGD CN

CANADA

6.29

6.32

-0.47

503.632

1.91

16

GOLD FIELDS LTD-SPONS ADR

GFI

SOUTH AFRICA

3.67

3.7

-0.81

774.809

1.71

17

SIBANYE GOLD- SPON ADR

SBGL US

SOUTH AFRICA

10.45

10.97

-4.74

224.546

1.41

18

PAN AMERICAN SILVER CORP.

PAAS

CANADA

15.42

15.25

1.11

151.5

1.41

19

DETOUR GOLD CORP.

OTCPK:DRGDF, DGC CN

CANADA

13.97

14.08

-0.82

157.422

1.32

20

B2GOLD CORP.

BTG US

CANADA

2.85

2.9

-1.72

675.978

1.16

21

IAMGOLD CORP.

IAG US

CANADA

4.07

4.05

0.49

376.76

0.92

22

CENTERRA GOLD INC.

OTCPK:CAGDF, CG CN

CANADA

6

5.91

1.6

236.395

0.85

23

ZIJIN MINING GROUP CO. LTD-H

OTCPK:ZIJMY, 2899 HK

CHINA

0.23

0.23

2.24

6008.16

0.84

24

CENTAMIN PLC

OTCPK:CELTF, CEY LN

JERSEY

1.18

1.14

3.52

1152.108

0.82

25

HARMONY GOLD MNG-SPON ADR

HMY

SOUTH AFRICA

3.06

3.06

0

435.819

0.8

26

PRIMERO MINING CORP.

PPP US

CANADA

8.01

7.94

0.88

159.575

0.77

27

ALAMOS GOLD INC.

AGI US

CANADA

10.02

10.1

-0.79

127.357

0.77

28

FIRST MAJESTIC SILVER CORP.

AG US

CANADA

10.83

10.72

1.02

117.499

0.77

29

SEMAFO INC.

OTCPK:SEMFF, SMF CN

CANADA

4.6

4.61

-0.22

276.065

0.77

30

HECLA MINING CO.

HL US

U.S.

3.47

3.44

0.87

343.129

0.72

31

AURICO GOLD INC.

AUQ, GRS US

CANADA

4.32

4.29

0.69

248.118

0.65

32

COEUR D'ALENE MINES CORP.

CDE US

U.S.

9.28

9.21

0.76

103.524

0.58

33

OCEANAGOLD CORP-CDI

OTCPK:OCANF, OGC AU

AUSTRALIA

3.05

3.09

-1.08

300.567

0.55

34

MCEWEN MINING INC.

MUX, UXG US

CANADA

2.88

2.84

1.4

297.159

0.52

35

ALACER GOLD CORP.

OTCPK:ALIAF, ANO CT

U.S.

2.56

2.65

-3.36

290.342

0.45

36

SILVER STANDARD RESOURCES

SSRI

CANADA

8.75

8.69

0.69

80.754

0.43

37

G-RESOURCES GROUP LTD.

OTCPK:GGPXF, 1051 HK

HONG KONG

0.03

0.03

-1.16

26490.08

0.41

38

ARGONAUT GOLD INC.

OTCPK:ARNGF, AR CN

U.S.

4.07

4.1

-0.73

154.146

0.38

39

ZHAOJIN MINING INDUSTRY - H

OTC:ZHAOY, 1818 HK

CHINA

0.61

0.58

5.79

874.346

0.32

Click to enlarge

Information obtained from Van Eck Global and valid as of 7/3/2014

The top four companies make up approximately 39.79% of the index. Let's take a closer look at their financial performance.

Company

Share Price 7/3/14

EPS (Earnings Per Share) TTM

Forward P/E

Goldcorp Inc.

$27.67

-$3.46

34.70

Barrick Gold Corp.

$18.44

-$10.39

21.06

Newmont Mining Corp.

$25.19

-$5.46

29.29

Silver Wheaton Corp.

$26.55

$0.90

28.08

Click to enlarge

All data obtained from Charles Schwab and accurate as of 7/3/14. Chart created by Nathan Buehler

The top three companies have all had poor earnings results over the past year. However, they are all projected to have positive earnings moving forward (a large benefit to the index). Many factors go into earnings, one of those being the price of gold. Let's view a chart of share price performance with the price of gold.

Despite the financial performances of the company, each company's stock price has closely followed the price of gold. There are a few exceptions, such as NEM's late-January drop, but as you can see from the chart, generally the pattern follows the price of gold.

Technicals

Click to enlarge

NUGT has crossed over the 50,100, and 200-day moving averages. Historically for this ETF, this signals a time for caution and the planning of an exit strategy. Breakouts higher, especially due to the 3x leverage, are still possible. It is all dependent on the price of gold.

Outlook for gold

Everyone seems to have an opinion on gold. My personal investments tend to side in agreement with Warren Buffett, which you can read here.

The point of this article is to review NUGT for its fundamentals and merit. However, to properly predict which direction it's headed, you need to properly predict the price of gold. Here are a couple opinions on the direction of gold. All links posted within the last 30 days.

Higher

Here

Here

Lower

Here

Who I agree with

Gold will ultimately move higher due to supply and demand factors. In the short term, we could see a temporary pullback but not a drastic plunge. A rise in the USD, after interest rates increase, would put more downward pressure on gold. Miners have been hit hard in the last year. I expect them to outperform if the price of gold begins to increase. Smaller miners have high operating costs, and with current levels, it is hard for them to break-even.

Hedging

If you would like to stay invested in NUGT for the next 40 days, I recommend hedging your position. You can review my quick hedging strategy here.

Conclusion

The improving outlook for gold makes NUGT seem attractive. The time value decay of this ETF is something that bears are watching. I do not suggest a buy-and-hold strategy here. With its performance over the last month, I would begin looking at taking profits or hedging your future speculation. Personally, I would be happy with the return and close out of my position. I learned a long time ago to lock in solid profits after meeting speculative goals. A wise man once told me to never apologize for locking in a profit. You might see more upside in NUGT, but the risks are evident.

Gold miner stocks have been hit hard the past year. A further decline in gold prices could cause some mines to shut down. This only further supports our long-term supply and demand theory. In the short-term, it would have a very negative effect on the gold miner stocks.

The next debt ceiling debate will be in March of 2015. American politics have undoubtedly influenced gold over the past 3 years. Debt ceiling debates, government shutdowns, default threats, etc. all push speculation into gold. Pay attention to Uncle Sam, lately he has been gold's driving force (in both directions).

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.