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Investments in gold have seen appalling results this year with physically backed gold ETFs like the SPDR Gold Shares (GLD) losing 26% in 2013 and Market Vectors Gold Miners ETF (GDX) shedding a massive 55% so far. The latter put up with more pain as it often trades as a leveraged play on gold, raising question on where this downtrend will stop.
While the Fed’s super-easy monetary policy and upbeat economic data have made equities a darling investment avenue, persistent concerns about the taper timeline also played its share of role in dulling the charm of gold investing in most of 2013.
Gold Mining ETF Fate in 2014?
Fed Taper Finally Comes: Putting an end to almost year-long speculation, the Fed has finally opted for a modest scale-back in QE in January. Monthly purchases of both mortgage and Treasury bonds would now be cut down by $5 billion each, leading to a $10 billion reduction in the bond buying program.
The Fed chairman, Ben Bernanke commented that the bond buying program will be curtailed in phases in 2014, if improvement in the labor market moves in accordance with their expectations, and QE might be fully completed by late 2014 (read: Fed Tapers Bond Purchases: 3 ETFs in Focus on the News).
A trimming in the easy monetary policy will likely send the price of the greenback higher and dampen the safe haven status of the yellow metal. In fact, after the Fed’s announcement of first withdrawal from the stimulus, GDX slipped 1.56% (on December 18).
Record Production: While demand for gold is fragile currently, the sector has come up with record production this year leading to about 25% fall in prices. As per Reuters, despite falling prices, gold miners are binging on volumes to improve revenues in order to spread out its huge fixed asset base. Analysts are expecting gold mining output to cross 3,000 tons a year for the first time in 2014. There is little chance of production cuts before 2015.
While fundamentals are certainly not encouraging, technical indicators show some signs of hope. The Relative Strength Index for GDX is presently 44.7 following the threatening taper announcement, up a bit, but still within the key middle range.
These indicators are actually hovering higher than the low-30’s level seen in early-December. This means although the fund is by no means overbought, the upturn signifies that investors’ faith is returning to the space, though very slowly.
However, other indicators are still lagging. GDX is currently lingering around its 52-week low. Its short-term moving average is well below the long-term average. GDX is also trading pretty much at the parabolic SAR level, suggesting there isn’t much of a signal from this look (read: Pain or Gain Ahead for Gold Mining ETFs?).
As much of the taper concerns are factored in by now and gold mining products are hovering at the 5-year low level, we don’t expect much of a downside for these products in the New Year, though the journey will be pretty rough (see all the Materials ETFs here).
If gold mining ETFs try to turn around at any point next year, they can only recoup some of the gigantic losses incurred throughout 2013. Further, the production and cost scenario will likely remain unfavorable for these products next year, indicating a dearth of positive fundamentals in the space.
Having said that, we believe, investors that have a strong stomach for risks can consider buying gold mining products. These products saw heavy sell-offs in the recent past and might offer a good entry point now on the buy side.
Investors should also note that the selling of gold-related investments has also been slower of late thus indicating that we are close to a bottom. The Fed has announced a modest trimming, but easy money will be very much in the economy (see A Comprehensive Guide to Gold Mining ETFs).
Thus, even if next year proves to be a tough one for gold mining funds with each measured taper announcement, the year after should dazzle investors in this in-focus corner of the market.
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