Should Investors Reconsider The Metal Mining ETFs?

by: Gary Gordon

Precious and industrial metal mining stocks were huge gainers during the bond-buying rumor rally. From Draghi’s “do-whatever-it-takes” hint on 7/26 through Bernanke’s QE3 announcement on 9/13, Mining ETFs rocketed more than nearly any other economic sub-segment.

Rumor Rally: Metal Mining ETFs Skyrocket On Expectation Of Unconventional Easing
% Run-Up (7/26-9/13)
Global X Silver Miners (NYSEARCA:SIL) 37.3%
Global X Copper Miners (NYSEARCA:COPX) 25.3%
Market Vectors Gold Miners (NYSEARCA:GDX) 25.2%
SPDR S&P Metals & Mining (NYSEARCA:XME) 25.0%
Market Vectors Steel ETF (NYSEARCA:SLX) 17.9%
S&P 500 SPDR Trust (NYSEARCA:SPY) 9.4%
Click to enlarge

Since respective peaks in mid-September, however, the metal mining sub-sector has come under increasing pressure. The run-up in the shares of these particular hard asset producers may have followed a classic “buy the rumor, sell the news” pattern.

For example, the first instinct for investors on rumors of central bank bailouts has typically resulted in declining developed world currencies and rising metal prices. If the prices of various metals stay high or move higher, the miners have even more incentive to increase production. Moreover, the profits should presumably benefit the shareholders of mining stocks. The presumption leads to “buy-the-rumor” speculation.

Then comes a dose of economic reality. The global economy is still weak. Mining firms that collectively produce tons and tons of “stuff” may find themselves oversupplying a world where the demand is lackluster. And investors in mining ETFs may choose to cash in while they still can. This activity is akin to “selling-the-news” trading.

(click images to enlarge)

Click to enlarge

In spite of the 10% pullback off of the September highs, SPDR Metals and Mining (XME) has demonstrated remarkable resilience. In the chart above, XME has bounced off 50-day support on several occasions. Moreover, the proxy for metal miners has been notching a pattern of “lower lows,” suggesting that a genuine uptrend may soon follow.

By the same token, one should probably curb his/her exuberance until there is a sustained breakout above the 200-day long-term trendline, After all, the plunge in iron-ore prices since 2010 has yet to support the idea that emergers like China are back in the economic saddle. (Note: The sketchy performance of SLX reflects this uncertainty.)

Click to enlarge

Still, the world’s most used metal may be suggesting that there is light beyond the tunnel. Copper demand may be returning, as Global X Copper Miners (COPX) is towing the line on its longer-term, 200-day moving average.

Click to enlarge

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.