Leaving many investors in utter shock, gold mining ETFs bounced back from their 2013-lows at the start of 2014 and kept on trending higher. Most market experts and investors expected gold mining ETFs – which lost over 50% in 2013 – to succumb to steeper losses with the greenback gaining strength on escalation of the Fed’s QE taper.
The fear of gradual cease in cheap-dollar inflow, emerging market lull, softer economic data, sub-par corporate guidance as well as overvalued stock markets initiated the ‘Great Un-rotation’ – stocks to bonds – to start the year. Apart from bonds, gold has also proved to be a big winner from this flight to safety.
Extreme low valuation also opened up buying opportunities for these ETFs. SPDR Gold Shares (GLD) added 5.86% while the biggest gold mining fund Market Vectors Gold Miners ETF (GDX - ETF report) surged about 17%. The latter enjoyed more gains as it often trades as leveraged plays on gold (read: 3 ETFs Surging on Weak Jobs Data).
Many gold miners are breezing past the broader market in the year-to-date time frame, with most stocks logging double-digit performances. Investors should note that among all regular gold mining funds, Market Vectors Junior Gold Miners ETF (GDXJ) stole the show by returning almost double (28.7% year-to-date) than GDX. This prompts us look for at the reason behind GDXJ’s recent success.
Inside GDXJ’s Recent Rally
Launched in November 2009, GDXJ – which looks to track the Market Vectors Global Junior Gold Miners Index – provides exposure to small and medium capitalization of companies involved in the gold mining business. With an asset base of $1.6 billion, GDXJ is one of the largest ETFs covering commodity producers’ equities. Apparently, a smart stock selection technique enables GDXJ to deliver big-time returns (read: Direxion Debuts Leveraged Junior Gold Miner ETFs).
Lower capitalization stocks trend to be more volatile than their large cap counterparts, and these see bigger moves when gold prices are either soaring or slipping. This is one reason why GDXJ is a good bet for investors looking for a higher payoff on a move in gold.
More than three-fifth of the assets are invested in Canadian companies with Australia coming a distant second at 20%. The U.S. (less than 10%), Europe, Asia and Africa also get some allocation.
GDXJ follows an almost equal-weighted methodology as opposed to GDX which puts more than 13% of its 36-stock portfolio each in Barrick Gold and Goldcorp while no stock accounts for than 4.32% of GDXJ’s 68-stock basket. This clearly offers a higher scope for diversification and lesser amount of risks (read: Any Hope for Gold ETFs in 2014?).
In line with many Junior Gold Miners, GDXJ declined about 80% from its April 2011 peak before it bottomed out in December 2013 thus opening up opportunities to make more profits at a fearful time like this.
At present, GDXJ is witnessing an uptrend on the fundamental strength of the underlying stocks. Added to this, excessive bearish sentiment over the space and the resultant oversold condition made it an intriguing pick. At the end, gold mining stocks had to recuperate, though not in full swing, after such a devastated year.
However, we might see the gap between the returns of GDX and GDXJ tapering in the coming days. Notably, GDXJ is more than 50% opened to Canadian dollar trailed by the U.S. (27%) and Aussie dollar (16%). On the other hand, its larger counterpart GDX is exposed to the U.S. dollar by as much as 89%, as per the data by xtf.com.
Thus, with the Canadian dollar losing strength to the greenback so far this year, GDXJ might not return outstandingly ahead, especially if the current pace of QE wrap-up remains intact. The American currency has gained 3.21% (as of February 10) so far this year against the Canadian currency. In short, if the Canadian currency appreciates, GDXJ benefits and vice versa (read: Inside the New Currency Hedged ETFs from iShares).
Also, GDXJ is currently hovering a little higher than its 52-week low price. However, its short-term moving average is still below the long-term average. GDXJ is also trading below the parabolic SAR indicator. This suggests continued bearishness for this ETF.
The relative strength index for GDX is presently 68.02, indicating that the fund is peeping into the overbought territory.
Overall, the gold mining space will likely see a mixed 2014 and will be busy paring down monumental losses incurred last year. Investors interested to bet on gold should follow the space closely as it is expected to be on a roller coaster ride this year.
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