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As Gold Miner ETFs Rally, Why Are Gold Prices Headed South?

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Leverage magnifies

As of April 25, 2016, the performance of the VanEck Vectors Gold Miners ETF (GDX) has significantly diverged from that of the SPDR Gold Shares (GLD) on a YTD (year-to-date) basis. This isn’t, however, an isolated phenomenon.

When gold prices fell by 11% in 2015, GDX amplified that loss by returning -25%. Calendar 2016 is different only in direction, with GDX amplifying gold’s gains positively this time. This leverage play is also clear in the performance of more leveraged ETFs such as the Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG), which has gained a staggering 248% YTD as of April 25.

As Gold Miner ETFs Rally, Why Are Gold Prices Headed South?

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Precious metal miner groups

Based on their unique characteristics, we categorize precious metals miners into the following five groups:

  • senior gold miners
  • intermediate gold miners
  • South African gold miners
  • royalty and streaming companies
  • silver miners

While there are certain overlaps in the categorization (some of the South African names could fit into senior or intermediate space, and silver miners could be either senior or intermediate), these are broadly based on the unique factors driving them.

Series overview

In this series, we’ll analyze miner performances on a YTD basis and explain any divergences. As the above graph shows, Harmony Gold (HMY), Coeur Mining (CDE), First Majestic Silver (AG), Kinross Gold (KGC) and Yamana Gold (AUY) have gained the most. We’ll try to deconstruct the GDX into various sub-categories and analyze their relationship to gold historically and YTD. This should give investors a better understanding of what to expect from gold prices and of which miners could underperform or outperform the Gold Miners Index going forward.

In the next part, we’ll explain the divergence between gold prices and senior gold miners.

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