Market Overview

Catalysts Abound For Exciting Gold Miners ETF

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Basic gold miners exchange-traded funds, including the SPDR Gold Shares (NYSEARCA: GLD), are among the stars of the commodities complex this year.

What Happened

Rising bullion prices are benefiting gold miners this year and that's good news for the Direxion Daily Gold Miners Index Bull 2X Shares (NYSE: NUGT). NUGT, which attempts to deliver double the daily returns of the NYSE Arca Gold Miners Index, isn't for the faint of heart.

Previously, NUGT was a triple-leveraged ETF, but that changed when volatility spiked. Still, this fund can pack a punch in short time frames as highlighted by a second-quarter gain of about 145%.

Why It's Important

Timing is critical with any leveraged ETF and these products are not intended for long-term holders – two points that are particularly true with NUGT. However, ample tailwinds remain for gold and those could prove useful to active traders embracing NUGT. Easy monetary policy around the world boosts the case for bullion, particularly after a first-quarter in which safe-haven demand propped up prices.

“Since then, investor focus has turned to the potential longer-term consequences of these monetary and fiscal decisions,” according to State Street. “At a high level, many of these actions may stand to benefit the outlook for gold. While gold has broadly tracked rising central bank balance sheet levels over the past two decades, gold investors should focus on the impact these debt levels may have alongside rising deficits and low rate policies on the US dollar (USD), and in turn the potential advantage for gold.”

Traders seem to be buying into the notion that NUGT has more near-term upside ahead of it as the geared gold miners fund took in $37 million since June 1.

What's Next

Another catalyst for gold prices and, potentially miners, is inflation resulting from all that aforementioned slack monetary policy. That's meaningful because inflation historically prompts investors to embrace gold.

“Instead, inflation may emerge in the form of currency devaluation, particularly with the US dollar, as a result of continued accommodative policies,” notes State Street. “A weaker dollar is inherently an inflationary action because it reduces the purchasing power of US consumers and investors. Monetary and fiscal policies geared toward a weaker dollar could greatly aid in reducing debt burdens through this inflationary effect – with a weaker dollar supporting growth through exports and reducing nominal values of debt outstanding.”

A weak dollar would be great – for gold – because the commodity is denominated in greenbacks.

 

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