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ETF News And Commentary

2013 has been pretty kind to stocks so far, with double digit gains the norm for most major U.S. benchmarks. However, the gains haven’t been universal, as many materials stocks have seen extremely weak trading in the year-to-date period.

Companies in this space have been hurt by an emerging market slowdown and a firm U.S. dollar which has kept a lid on prices for their main outputs. While this trend has impacted most firms in the basic materials space, it has been especially the case in the precious metal miner world (see Brutal Trading Continues in Gold Mining ETFs).

Miners of precious metals have been impacted by the above trends, and a lack of demand for safe havens as well. And with a booming stock market and few prospects for a huge downturn in the near future, many expect this trend to continue in the near term too.

Reversal at Hand?

However, despite this gloom over the mining space and its long term outlook, there have been some more positive rumblings in the space lately. This came thanks to concern over the Fed’s bond buying program, extreme volatility in the Japanese stock market, and big losses in other safe havens like high dividend paying stocks and Treasury Bonds.

This has helped to send stock prices lower, push gold prices back higher, and rekindle demand for safe haven commodities. The trend also led to a bottom in gold mining stocks too, as these easily beat out broad stocks in the past five day time frame (also see Is the Gold Mining ETF Slump Over?).

In fact, while the S&P 500 finished flat over the past five days, the Market Vectors Gold Mining ETF (GDX - ETF report) added about 8.4% while the Market Vectors Junior Gold Mining ETF (GDXJ - ETF report) surged by 11.8% in the same time frame.

This represents a huge reversal for the mining space, as from a trailing six month look, these two funds have significantly underperformed the S&P 500. Both are down more than one-third in the time frame, compared to an 18% gain for the benchmark American index, suggesting that the recent trading in the space is a welcomed turn of events.   

What Does This Mean?

Clearly, gold has recaptured its role as a hedge in recent trading sessions, jumping while markets have been flat and fear levels have been elevated. Prices have rebounded nicely over the past few sessions, helping the metal to finish the month off of its lows (read Time to Buy this Precious Metal ETF?).

This has been a boon for gold mining stocks, as these companies often trade like a leveraged play on the underlying metal. It has also been a very surprising turn of events for the space, as gold miners haven’t exactly lived up to expectations, suggesting that this week’s solid performance was a minor victory for long term investors and a nice pick up for traders who were looking for a bottom in the segment.

Outlook

Despite the large moves higher, one might still have a hard time being optimistic over gold miners—or even gold—in the medium term. Recent data points still favor the bulls which could signal some more short term turmoil for gold mining stocks.

This is especially true when one considers the horrendous Zacks Industry Rank currently afflicting the gold mining sector. The space currently has a Rank in the bottom 10% of all industries, while only one of 43 companies in the sector has a Zacks Rank #2 (Buy) or better.

Given this extremely unfavorable earnings estimate picture, it seems unlikely that the gold mining space can continue this run over the long haul. So, investors may want to think of this recent jump as a great opportunity to either get out of gold mining, or to consider a short play on the space (read Time to Buy the Covered Call Silver and Gold ETFs?).

After all, with the weakness in the earnings picture for these firms, the pain may not yet be over for gold miners, suggesting that extreme caution needs to be taken in this incredibly volatile—and ever popular—corner of the market.

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