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
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-
While we take a look at
Market Vectors Gold Miners ETF (
- 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
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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