Investing in gold has been pretty rough this year. The pain became more acute when it came to investing in gold mining ETFs as these often trade as leveraged plays on gold. The precious metal was badly beaten down in the first nine months of the year be it in physical or equity form.
Let’s see how things shaping up now for the near-term and long-term investment purpose:
Thanks to the lingering uncertainty in the taper timeline, especially after the Fed’s latest comments that a scale back in QE might be in the cards in next few FOMC meetings, investors fled precious metals in droves.
As we all can understand, 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. As per the Fed officials, though the economy is still far from the level where it can stand on its own feet, the economic indicators significantly improved from the year-ago level.
Reflecting the Fed’s recent comments, the gold miners ETF plunged to its 5-year low, and is within striking distance of their all-time lows as well (read: A Comprehensive Guide to Gold Mining ETFs).
A Technical Look at Gold Mining ETF- GDX
While we take a look at Market Vectors Gold Miners ETF (GDX) – one of the popular gold mining ETFs on the market with AUM of $4.25 billion and a trading volume of roughly 38 million shares a day – the downtrend gets more visible.
The fund was down over 8.5% since November 20 and lost more than 50% in the year-to-date frame. GDX is currently hovering around its 52-week low and might hit another low in the near term. Its short-term moving average is well below the long-term average as depicted by the 200-Day SMA in the chart below. This suggests continued bearishness for this ETF.
This is further confirmed by the downturn in the Parabolic SAR. The current price of GDX is trading below the parabolic SAR (PSAR) indicating a bearish trend for the product (read: Silver ETFs Stumble, Fresh Lows Next?).
While a near-term bearishness in warranted in the wake of the Fed’s taper concerns, we believe the picture is not that gloomy. The Relative strength Index for GDX stood at close to 29.5 reflecting a somewhat oversold position mainly due to the panic selling and the fund fell to the undervalued territory.
Thus, at the current level, risk-tolerant investors can consider riding out gold mining ETFs on their dips. But the strategy should be ‘hold’ to realize the long-term capital gain and withstand the imminent volatility amid taper talk (see Gold Mining ETF Investing 101).
Demand scenario should hold up well in the foreign markets as well with the arrival of the wedding season in India – the largest consumer of the world’s gold. China is also fast catching up to become the largest buyer of gold soon.
On the domestic front, while the economy is healing, it is still not out of the woods. Dismal housing sales data and overall retail earnings in the recent months point to sluggish consumer confidence.
Hence, if the Fed decides to support the economy through monetary stimulus as long as it needs to and does not cut back on QE before next year, gold might get a respite (read: 5 ETFs Surging on Bernanke's Dovish Comments).
And even if the Fed tapers in December, we believe much of the shock is presently priced in gold mining ETFs as well as in bullion thus causing lesser damage when the step is actually taken.
Also, the Fed has vowed to keep the interest rate low amid taper which will keep the bond yields and the dollar price in check. And a check in dollar price is basically good news for investing in precious metals. As of now, only the timing of taper will tell if the yellow metal will shine or lose luster in the coming months.
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