Market Overview

Can Things Get Any Worse For Mining ETFs?

Related GLD
#Premarket Prep Technical Update - Gold Trading Lower
EUR/USD: Break Of 1.35 Looks Imminent

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 (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV), 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). 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: GLDX), 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 all-time low.

We should also take this opportunity to welcome the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) 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 (NYSE: SIL) 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: SLVP), 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 creations, recently. Duh.

Both funds have been damaged by their allocations to Silver Wheaton (NYSE: SLW), Coeur d'Alene (NYSE: CDE) and Pan American Silver (Nasdaq: PAAS), 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 HERE.

Posted-In: Long Ideas News Sector ETFs Short Ideas Futures Technicals Commodities Events Best of Benzinga

 

Most Popular

Related Articles (GDX + CDE)

Around the Web, We're Loving...

Partner Network

Get Benzinga's Newsletters