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Why GLD and GDX Have Diverged This Year

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GDX and GLD

The VanEck Vectors Gold Miners ETF (GDX) tracks the performance of the NYSE (New York Stock Exchange) ARCA Gold Miners Index. Its major holdings are senior and intermediate precious metal miners listed in the United States and Canada. Currently, Newmont Mining (NEM), Barrick Gold (ABX), and Newcrest Mining are the fund’s top three holdings, comprising 9.3%, 7.3%, and 6.2%, respectively. Franco-Nevada (FNV) and Goldcorp (GG) are the next largest holdings, accounting for 6.2% and 5.2%.

GDX had fallen 5.5% YTD (year-to-date) as of February 12, 2018, representing a significant underperformance of the SPDR Gold Shares ETF (GLD), which returned 1.4% in the same time period. GLD is the largest physically backed gold ETF tracking the performance of gold.

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Divergence between GDX and GLD

GLD’s and GDX’s performance can diverge, with the funds usually following gold prices and gold equities, respectively. While GLD tracks physical gold prices, similar to gold equities, GDX is a leveraged play on gold prices. The operational and financial leverage of those holdings can have a significant bearing on the performance of GDX.

Leverage at play

When gold prices are high and increasing, leveraged ETFs and equities usually outperform commodities, and vice versa. This relationship, however, has not played out very well YTD. The Direxion Daily Gold Miners Bull 3x Shares ETF (NUGT), for example, has fallen 20.5% YTD, while the Direxion Daily Gold Miners Bear 3X Shares ETF (DUST) has returned 14.2%. For more about gold’s recent direction, read Could Gold Catch a Bid if Equities Stay Weak in 2018?

It’s important to note, however, that these leveraged funds provide greater returns during an upward move. As there are considerable risks, investors should tread cautiously when investing in precious metals through leveraged ETFs. Before we delve into precious metal miners’ subcategories and their YTD performance, let’s have a look at which precious metal miner stocks have outperformed gold.

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