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Gold ETF Slump Continues, Drags Down Mining Stocks

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Although there was a brief period of gains in July for the beaten down gold space, these seem like a distant memory now. The metal has continued its sluggish 2013 trend once more, and is seeing its gains from July completely retraced by terrible trading to start August.  

The biggest reason for this slide is more pessimism—at least from a gold bug’s perspective—regarding QE. With unemployment now at 7.4% and solid figures coming in from the manufacturing side of the economy, there is some reason to believe that the economy is back on track and that less accommodative policies are needed.

This was further confirmed by a recent speech by Dallas Fed President Richard Fisher who called for tapering to begin in September. "I am of the opinion that unless we see some disturbing data...that we should start in September," said the regional President in a talk earlier in the week (also see Protect Against Rising Rates with Floating Rate ETFs).

If this speech and the solid data weren’t enough, investors could one last piece of news that could be bearish for gold, the trade deficit report. The deficit fell by 22.4% to $34.2 billion, the smallest deficit since the fall of 2009, a level which could signal that second-quarter GDP will be revised higher, further adding to the woes for precious metal investors.

Market Impact

Thanks to this news, investors saw some more bearish trading in the gold market, as the precious metal fell below $1,300/oz. This news also had a negative impact on gold ETFs with (GLD - Free Report) and (IAU - Free Report) losing about 1.2% each, pushing both of these popular products back towards near term lows once again (read The Comprehensive Guide to Gold ETF Investing).

However, the real pain continued to be in the gold mining space as this sector took the worst of the losses once more. The most popular gold mining ETF, the Market Vectors Gold Mining ETF (GDX - Free Report) , lost about 3.5% on the session, while the Market Vectors Junior Gold Miners ETF (GDXJ - Free Report) slumped by about 3.7% on the day.

This continued the trend for these four ETFs as the gold bullion funds are both down about 3% over the past five days, while the gold mining ETFs are approaching double digit losses for the time period. Now, the trading in much of July seems like just a blip on the radar, and merely a temporary respite from the selling pressure.

Bottom Line

There was some hope for gold and gold mining ETFs at the tail end of July, as there was a bit of optimism that QE had longer to run. However, recent data and comments from members of the Fed suggest that this might not be the case (see Time to Buy the Covered Call Silver and Gold ETFs?).

This could be particularly true when looking at some Zacks Ranks for the industry. Gold mining is currently in the bottom five percent from a Zacks Industry Rank perspective, while gold bullion—via the Zacks ETF Rank—has recently been downgraded to a hold.

Given this, investors may want to avoid these products for the time being, as more losses could definitely be around the corner. The outlook for gold continues to be quite sluggish, and with strong data around nearly every corner, the threat of reduced QE is becoming more and more real by the day, suggesting that more pain could be ahead for this already beaten down space in the months ahead.

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