Market Overview

Even The Pros Struggle With Gold Miners ETFs

Even The Pros Struggle With Gold Miners ETFs

A frequent point of frustration for investors during gold's multi-year bull market has been the inability of mining stocks and ETFs to keep pace with bullion. The statistics highlight that frustration. Over the past five years, the Market Vectors Gold Miners ETF (NYSE: GDX) is up just two percent while the SPDR Gold Shares (NYSE: GLD), which offers exposure to physical gold, has more than doubled.

Over the past three years, GLD has jumped 45.3 percent while GDX is off 3.3 percent. Making the situation even worse is volatility. As in GDX's volatility over the past three years 32.1 percent compared to 18 percent for GLD.

Even some of the brightest minds on Wall Streets have struggled with positions in GDX and other mining ETFs. Take the examples of Greenlight Capital's David Einhorn and Soros Fund Management's George Soros. Simply put, these gentlemen did not attain legendary status in the financial community by being wrong very often. In pop culture parlance, Einhorn and Soros are like Charlie Sheen. They win...a lot.

However, the disconnect between gold and gold miners can test even the savviest of investors. In third quarter of 2011, Greenlight pared its holdings of bullion and moved into GDX. At the time, Einhorn highlighted the aforementioned disconnect between gold and shares of the miners that extract the yellow metal from the earth, Bloomberg reported.

"Given the challenging macroeconomic environment, we intend, for the foreseeable future, to continue holding a significant position in gold," Bloombeg reported, citing a Greenlight filing with the Securities and Exchange Commission.

Greenlight's most recent 13F filing shows the firm held about $315 million worth of GDX at the end of the third quarter. There is a fair chance the hedge fund is in the red on that position.

In the third quarter 2011, the lowest closing price for GDX was just under $54 while the highest close was just under $66. Today, the ETF barely hovers above $47, indicating that holders of the ETF with a cost basis in the mid-$50s would have had to do some dollar-cost averaging in the second and third quarters of this year when the ETF slumped.

This is not to say Greenlight is out of the money by $10 a share on GDX. However, it is also fair to say that the largest gold miners ETF has not been another Lehman Brothers or Green Mountain Coffee (NASDAQ: GMCR) for Einhorn. At least not yet.

As for Soros, at least it can be said that he holds some shares of GLD. In fact, Soros Fund Management added 884,400 shares of the world's largest gold ETF during the third quarter to bring its stake in that ETF to 1.3 million shares at the end of the quarter.

However, Soros also boosted his stake in GDX. At the end of August, Soros Fund Management owned 1 million shares of GDX. That total swelled to 2.32 million shares, according to the firm's most recent 13F.

Again, it depends on when Soros was adding to GDX, but the ETF spent all of September and October trading above where it resides today.

Beyond GDX, Soros has another potential problem in the form of the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), the small- and mid-cap equivalent to GDX. In the past year, GDXJ has plunged nearly 29 percent. Soros Fund Management owned 2.4 million shares of GDXJ at the end of the third quarter. Since the end of the second quarter of 2011, GDXJ has shed 35 percent of its value.

Things have not been much better for the miners in recent weeks. GDXJ is off 8.3 percent in the past month while GDX has given up 7.8 percent over the same time. Smaller investors that, like Einhorn and Soros, see value in the miners can implement a hedge. After all, that is what hedge funds are supposed to do, right?

That hedge, and it is one that should be used over short-term time frames, is the Direxion Daily Gold Miners 3X Bear Shares (NYSE: DUST). The aptly named DUST has jumped 19.4 percent in the past month.

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