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Einhorn, Soros Differ on Gold Mining ETFs

February 15, 2013 2:52 pm
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The woes of gold mining stocks and ETFs, in particular the Market Vectors Gold Miners ETF (NYSE: GDX), have been a frequent topic of conversation among traders for over a year now. The story goes like this: Gold miners vexed traders and investors by not rising in unison with gold futures. That much is evident by the fact that GDX, the largest gold miners ETF by assets, is down 31 percent over the past two years.

Over the same time, the SPDR Gold Shares (NYSE: GLD), the largest ETF backed by holdings of physical gold, is up 17 percent. Not surprisingly as ETFs such as GLD have recently faltered (that fund is off 6.3 percent in the past 90 days), the losses have been worse for the likes of GDX. Over the same 90-day period, GDX is down 13.1 percent, more than double GLD’s loss.

Ongoing downward spirals for GDX and its constituents might be the reason George Soros parted ways with a significant chunk of his stake in that ETF during the fourth quarter. Soros owned 1.5 million shares of GDX at the end of the fourth quarter, compared 2.3 million shares at the end of the third. \

Soros also sold 400,000 shares of the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) during the fourth quarter to bring his stake in that ETF to 2 million shares.

David Einhorn apparently has a different view of the matter. Einhorn’s Greenlight Capital owned approximately 6 million shares of GDX at the end of the fourth quarter, according to the hedge fund’s most recent 13F filing. That is roughly the same amount of GDX Greenlight owned at the end of the previous quarter.

While this does not amount to a Bill Ackman versus Carl Icahn type of tussle, it looks like Soros was right to trim his exposure to GDX and GDXJ. On the other hand, Einhorn is dealing with a falling knife in GDX.

On February 5, Chris Kimble of the eponymous Kimble Charting Solutions noted that if GDX violated support around $42.15, the ETF was doomed to more downside. That was just nine trading days ago and today GDX is off more than three percent on volume that has already surpassed the daily average. The ETF is struggling to hold the $40 mark.

Making matters all the more dangerous for Einhorn and his fellow GDX investors is the fact that gold futures are at a critical juncture. This week, bullion has struggled to stay above the psychologically important $1,650 per ounce area.

As Kimble notes, further deterioration from here could mean gold futures test $1,300. That would mean GLD would likely fall to around $130, a roughly 16 percent decline from current levels.

While it must be noted that GDX does not move with GLD on a dollar-for-dollar basis, it also cannot be forgotten that the former’s recent slide is more than twice as worse as the latter’s. If that trend holds, gold futures do test $1,300 and GLD falls 16 percent, GDX could tumble 30 percent or more.

That means the Direxion Daily Gold 3X Bear Shares (NYSE: DUST) becomes all the more alluring. As it is, when accounting for Friday’s gain of more than 10 percent, DUST is up more than 39 percent in the past month. As a leveraged ETF, DUST is not meant to be held for long time frames, but the returns indicate that it is the best way to play gold miners in the short-term.

For more on gold miners, click here.

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