Gold Miner ETFs: Falling Knife Or Turnaround Play?

by: Tom Lydon

Gold miner ETFs have been brutal to investors for years, sort of a falling knife and a value trap wrapped into one.

The sector has trended lower since late 2011 despite some violent rallies along the way.

Market Vectors Gold Miners ETF (NYSEARCA:GDX) rallied more than 4% on Wednesday after dropping to levels last seen in 2009.

Trying to time a bottom in gold miners in recent months has been a total disaster as bullion prices also decline. But with sentiment in the toilet and an interesting technical setup, this could be the long-awaited bounce for gold miners.

Indeed, gold mining companies are trying to lure exasperated investors with more cost disclosure.

From a technical perspective, gold miners need to make a stand here, says Chris Kimble at Kimble Charting Solutions. He notes an index of gold mining stocks has dropped to a 10-year support line as well as a so-called Fibonacci retracement level.

Turning to physical gold, bullion has not shined as brightly as it has in the past, but physical gold looks resplendent when compared to gold miner stocks and related exchange traded funds such as GDX.

Equities have rallied 21% after bottoming in June 2012, writes Ashraf Laidi for City Index, but gold bullion has declined 1% over the same period and the Gold Bugs Index, which tracks 16 popular gold mining firms, declined 20%.

SPDR Gold Shares (NYSEArca: GLD) is down 6.9% over the past year, compared to a 31.8% decline over the same period for GDX, the miner ETF.

From the September high, the Gold Bugs Index fell 31% while physical gold lost 13% from its October high.

Gold futures have dropped below $1,600 an ounce. Consequently, the bullion is now over four times the Gold Bugs ratio, the highest in 12 years.

Gold stock traders have preferred miners over bullion, arguing that stocks carry intrinsic value through capital appreciation, dividends, good management and potentially higher returns exceeding cost of capital.

On the flip side, gold producers have experienced underestimated cost overruns, higher production costs, over concentration on boosting output to chase rising bullion prices, costly mergers & acquisitions and labor unrest, which have all weighed on gold stocks.

Meanwhile, gold has outperformed because investors sought out bullion as a safe-haven asset on greater quantitative easing, higher inflation expectations, recurring volatility, Eurozone woes and periodic U.S. budget delays.

However, gold has recently seen its 55-day moving average drop below its 200-day moving average, back-to-back quarterly declines - the first time since 2000 and prices below 100-day averages - the first time since 2008.

Other gold miner ETF performances over the past year include:

  • Market Vectors Junior Gold Miners (NYSEARCA:GDXJ): down 41.1%
  • PowerShares Global Gold and Precious Metals Portfolio (NASDAQ:PSAU): down 30.1%
  • MSCI Global Gold Miners Fund (NYSEARCA:RING): down 34.1%
  • Global X Pure Gold Miners ETF (NYSEARCA:GGGG): down 39.1%

Market Vectors Gold Miners ETF

Max Chen contributed to this article.

Full disclosure: Tom Lydon's clients own GDX.

Disclosure: I am long GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.