It's an oft-pondered riddle: How can the shares of mining
stocks lag and even fall when the prices of the metals they mine
rise? A vexing scenario to be sure and one that gives to way to
the harsh reality that if ABC Corp. mines gold or silver and it's
stock price doesn't go up in conjunction with the futures price,
then it's a lock that ABC's shares are going to be in for
significant selling pressure when the price of the metal it
extracts from the earth falls.
Welcome to that reality. In recent days, the SPDR Gold Shares
) and the iShares Silver Trust (NYSE:
), the two largest ETFs backed by physical holdings of the
precious metals in their titles, have given up all of their 2012
gains and turned negative on the year.
Those declines began in earnest in March and have accelerated
rapidly since the start of April, forming a tidal wave that has
sent gold and silver mining ETFs tumbling in even more dramatic
fashion. There have been
bold calls in defense of the mining ETFs
, but to this point, sticking one's neck out for these funds has
been akin to volunteering to go to the guillotine.
Here's how the landscape for gold and silver mining ETFs
shapes up at the moment starting with the group's largest fund,
the Market Vectors Gold Miners ETF (NYSE:
). GDX will observe its sixth birthday on May 16, but there's not
much reason to celebrate. Following Tuesday's 4% drop, the ETF is
trading below its $40 debut price,
something we've established is a bearish sign
GDX traded as low as $17.80 in 2008 and while it would be a
bold call to say the ETF falls that much further, it's worth
noting the RSI on GDX's daily chart has only recently started to
show an oversold condition. Some have
made a bull case for GDX's technicals
but that's a dangerous game to play at the moment.
As for the Global X Gold Explorers ETF (NYSE:
), let's just say this is a case of bad timing. The fund debuted
in November 2011 and has managed to lose almost 58% since then.
Tuesday's close at $7.10 wasn't just a 52-week low, it was an
We should also take this opportunity to welcome the Market
Vectors Junior Gold Miners ETF (NYSE:
) to the all-time low club as well. Believe it or not,
investors have been putting new capital to work
in this ETF
. To be precise, GDXJ has seen $90.3 million in inflows over the
past week, according ETF Channel data.
These days, purchases of GDXJ include an invitation to the
"catch a falling knife" competition as the fund has lost 18% in
the past week alone. Making things all the more inviting for
short sellers is the fact that, like GDX, GDXJ has only just
become oversold and at these levels, there may not be any support
until the $14-$15 area.
Not surprisingly, silver mining ETFs, of which there are two,
have not been peaches either. The Global X Silver Miners ETF
) lost 5% on volume that was nearly double the daily average on
Tuesday. Once SIL violated support at $20 earlier this month,
that was one more sign this party was going to turn nasty. This
was a $26 ETF in March,
To be fair, SIL is not the only silver mining ETF offender.
The iShares MSCI Global Silver Miners Fund (NYSE:
), which isn't even four months old, has lost a third of its
value since its late January debut and is home to less than $2
million in AUM. SIL and SPLV
have seen more in the way of redemptions than
Both funds have been damaged by their allocations to Silver
), Coeur d'Alene (NYSE:
) and Pan American Silver (Nasdaq:
), to name a few.
Making matters worse are recent statements made on Monday by
the World Gold Council that miners need bullion to trade at
$1,300 an ounce to survive and will need gold to jump to $3,000
an ounce in
five years to remain profitable
. That's almost a double from current levels.
As investors already know, even if gold and silver get their
respective acts together and start marching higher once again,
there are no guarantees the miners will follow suit. That much
has already been proven.
For more on gold mining ETFs, please click
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.