Inside the Recent Gold Miner Plunge


"The Fed taper throughout 2014 in the wake of economic improvement in the U.S. strengthened the greenback, which in turn weighed on metal investing."


Gold as a commodity had seen a lot of euphoria this year thanks to prolonged global worries over militant attacks in Iraq, bleak U.S. growth data in winter and the much talked about geopolitics between Ukraine and Russia. The metal's safe haven status has bolstered its prices by 4.8% in Q1 and 2.7% in Q2 (read: Is Time Ripe for Gold Mining ETFs Amid Rising Tensions?).

However, the metal snapped the trend stepping into Q3, losing about 8.7% so far this quarter. Investors should note that gold mining products generally trade as a leveraged play on underlying commodities. So when gold prices rise, these mining ETFs emerge as true winners and vice versa, which unfortunately has been the case as of late.

Quite expectedly, gold's Q3 blues will be reflected in its miners' version as well, which is why the Market Vectors Gold Miners ETF has lost about 16% in the third quarter. Had there been no geo-politics or a harsh winter, gold mining ETFs would still have performed poorly this year. The Fed taper throughout 2014 in the wake of economic improvement in the U.S. strengthened the greenback, which in turn weighed on metal investing (read: Can Gold Mining ETFs Dazzle in 2014?).

Inside Recent Gold Miner Plunge

With the U.S. economy finally gathering steam and having progressed at the rate of 4% in Q2, speculations over an imminent rise in interest rates have taken the front seat, though the Fed has repeatedly asserted that it will provide support as long as the economy needs. Many market participants are looking for a revision in the Fed's forward guidance in the next policy meeting.

As a result, the U.S. dollar soared to the six-year high against the yen and the one-year high relative to the euro. The U.S. currency also peaked since July 2013 relative to a set of 10 currencies. Quite expectedly, the dollar strength has sapped the demand for the yellow metal.

Moreover, Russia and Ukraine—being in the headlines since the start of the year for the former's annexation in Crimea (erstwhile a Ukrainian territory)—has reached a cease-fire putting an end to further geopolitical concerns. Notably, the tension between these two nations was not only limited to Eastern Europe, it had a ripple effect in the Western countries as well (read: 3 Russia ETFs at Bargain Prices Right Now).

However, an expected end to the heightened geopolitics reduced investors' hunger for the safe haven assets like gold as they once again returned to the risky assets. Meanwhile, the Eurozone announced another steep cut in key interest rates and an asset buying program next month, spurring investors to opt for risky assets.

Also, a reiteration of 10% import duty on gold in India and a slowdown in China—two of the biggest importers in the world—kept the demand muted. The bearish Zacks Industry Rank also validates this downtrend (read: Gold Mining ETFs Slip Following Mixed Earnings Results).

Within the Zacks Industry classification, the rank of the concerned Gold Mining Industry is currently #168. The rank is in the bottom 37% of all the roughly 260 industries ranked, highlighting the group's near-term relatively unfavorable outlook (read: About Zacks Industry Rank).

ETF Impact

All gold mining ETFs witnessed a downslide last week with GDX, Market Vectors Junior Gold Miners ETF (GDXJ), iShares MSCI Global Gold Miners ETF (RING), Gold Explorers ETF (GLDX), Global Gold and Precious Metals Portfolio (PSAU), Pure Gold Miners ETF (GGGG) and Gold Miners ETF (SGDM) shedding in the 6% to 9% range for the week.

A Technical Look at Gold Mining ETF- GDX

If we take a look at GDX—a popular gold mining ETF on the market with AUM of $8 billion and a trading volume of roughly 30 million shares a day—the downtrend gets more visible. The fund was down over 7% last week though it has gained about 5% in the year-to-date frame.

The Relative Strength Index for GDX is presently 29.4 suggesting that the fund is in an oversold territory. The short-term moving average (9-day) for GDX is well below the mid-term average (50-day) suggesting continued bearishness for this ETF. The current price of GDX is trading below the parabolic SAR (PSAR) indicating a bearish trend for the product.

Bottom Line

The near-term certainly looks shaky for the gold mining space with the past few weeks being hard hit. Steep losses have been incurred, although this has only rubbed out prior gains. At this moment, we don't find any meaningful driver though a wild ride can be witnessed if any U.S. economic data falls short of expectation, growth in China accelerates or emerging market woes return to the picture.

Also, if the stock market succumbs to a correction following the hike in interest rates, gold might see a short-term turnaround as the commodity and the related products are presently hovering in the oversold territory.

Zacks Equity Research

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