Expect More Weakness Ahead For Gold Mining ETFs

minersFor investors who thought that the worst was over in the precious metals ETF market, Monday’s trading was a rough continuation of the downward trend. In fact, trading on Monday was the worst in years with gold losing about 9% on the day as more panic selling ensued for the precious metal.

Volume levels were also pretty extreme, with GLD trading more than 90 million shares on the day. Considering that (GLD) usually sees about 10 million shares on a normal session, this represents a huge burst in trading activity, and was actually enough to put the popular ETF into the top five for volume in U.S. markets on the day.

(IAU), easily the second most popular gold ETF, was also impacted by the events and saw a big jump in trading activity. This fund usually does about 8.5 million shares in a normal day but did about 70 million shares in Monday’s chaotic session.

What Happened?

A number of factors conspired on Monday to push gold prices lower once more. In addition to the rising pressure from strong stock prices, a more robust economy and a firm dollar, investors also focused on Chinese data.

GDP growth in that important gold buying country came in at just 7.7% for the first quarter, less than analyst expectations. Furthermore, the 7.7% figure represented a drop from the previous quarter in which growth came in just below 8%, leading many to believe that China is slowing down (See Gold ETFs in Focus: When to Consider GLDI).

Given that China is a crucial buyer of the precious metal, investors viewed this as one more nail in gold’s coffin. This is especially true coming off the back of a ‘sell’ call from Goldman Sachs on the metal, leaving investors with little reason for optimism in the short-term on gold.

Gold Miner ETFs in Focus

Yet as bad as it was in the gold ETF market, events were arguably worse in the gold mining space. Many of these equity products fared even worse in the session, losing double digits in some cases.

Consider this brief rundown of some of the biggest gold mining ETFs and how they performed in the session:

  • Global X Pure Gold Miners ETF (NYSEARCA:GGGG) – down 13.5%
  • Market Vectors Gold Miners ETF (NYSEARCA:GDX) – down 9.9%
  • Market Vectors Junior Gold Miners Fund (NYSEARCA:GDXJ) – down 12.5%
  • PowerShares Global Gold and Precious Metals Portfolio (NYSEARCA:PSAU) – down 10.4%
  • Global X Gold Explorers ETF (NYSEARCA:GLDX) – down 12.7%
  • iShares MSCI Global Gold Miners ETF (NYSEARCA:RING) – down 10.5%

As you can see, anything that was even remotely attached to gold suffered heavily in Monday trading. Interestingly, the big cap—and most liquid—product GDX performed the best and was the only one to escape a double digit loss.

Meanwhile on the other end of the spectrum, the pure gold mining ETF from Global X, GGGG, did the worst, largely thanks to its heavier exposure to small and mid cap firms. This was further confirmed by the weakness in GDXJ and GLDX, two of the more volatile products in the space which also focus on smaller securities.

Leveraged Gold Mining ETFs

As expected, trading was especially volatile in the leveraged ETF market as well. The Direxion Daily Gold Miners Bull 3x Shares (NUGT) lost an astounding 29.6% in Monday’s session, bringing the YTD figure to a 78% loss.

Meanwhile, the Direxion Daily Gold Miners Bear 3x Shares Fund (DUST) added an impressive 29% on the session on volume that was roughly four times normal. And, thanks to the downward trend nature of gold over the course of the year, the inverse ETF has added over 215% YTD, showing that at least some investors have been making serious profits on gold’s epic decline so far in 2013 (also read Three Biggest Mistakes of ETF Investing).

Bottom Line

This has been an extremely rough stretch for gold mining ETF investors, with most products losing double digits in a single session. And given the broad capitulation in the space, some are expecting more weakness in the days ahead.

Clearly, great caution needs to be taken when investing in this once safe haven space, as the metal—and mining ETFs tracking the segment—are experiencing extreme volatility. This could definitely continue in the short term, as fundamentals and broad confidence in the yellow metal is at a very uncertain stage, suggesting that we could see several more wild sessions in the days ahead.

This article is brought to you courtesy of Eric Dutram From Zacks.

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