Is There Any Hope For Metal Mining ETFs?

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October 27, 2013 10:21pm NASDAQ:CU NYSE:GDX

gold miner pickInvesting in metal mining ETFs has been pretty rough this year. After a bad stretch in the first half of this year, metal mining ETFs recovered somewhat thanks to the taper concerns as well as a sluggish dollar. 

However, Fed’s decision to hold back tapering of its monthly bond buying program on Sep 18 led to another slump for the mining ETFs. (Read: Inside Biotech ETFs–Can the Run continue?)

While the ‘Taper hold’ decision infused fresh life in the equity market, it beat down precious metals like gold and silver causing these products to underperform the broader stock market greatly. The situation is even more depressing for the miners as compared to their bullion tracking counterparts as most mining companies tend to be a leveraged play on the prices of underlying metals.

The most popular gold mining ETF, (NYSEARCA:GDX), has lost 15.7% (as of October 8) since September 18, while the most popular silver mining ETF (NYSEARCA:SIL), copper mining ETF First Trust ISE Global Copper Index (NASDAQ:CU) and Global X Junior Miners ETF (NYSEARCA:JUNR) respectively lost 18.4%, 8.0% and 11%, suggesting a languishing trend across the space.

Apart from the issues in the US, a week-long National Day holiday in China was also responsible for some declines in mining ETFs in the past week as China is the major consumer of many metals. As far as gold is concerned, the largest importer India passed a bill about two months ago, which stipulates that a fifth of all imports are to be re-exported. All these factors had a cautious impact on the metal mining market.

Below is the chart highlighting the extent of loss these mining ETFs suffered in the last one month period as of October 8, 2013.

Is There Any Hope?

Although a mining rally is losing steam of late thanks to the completely unanticipated “Taper Hold” that reversed investor attention towards the stock market, the Fed’s cut in GDP outlook implies that the picture is not as rosy as perceived by most.

This sentiment may provide a little support to the commodity outlook. Also, the industrial economy seems to be reviving somewhat across the globe, while the relatively sluggish dollar is also boosting demand for hard assets.

We expect some funds like copper mining ETFs not to be too ruthlessly affected, as long as China – the major importer of the metal – stages a good show. Better economic data is coming out of Eurozone. Moreover, the peak wedding and festive season is just around the corner in India which might give an upward thrust to the demand for gold (read: Gold Mining ETF Investing 101).

Lastly, sooner or later Fed will start tapering its monetary stimulus package, though it is not final yet, so commodities may still have some room to run in this weak dollar environment. And if at all a taper takes place in some time, the imminent volatility can tag metals especially gold, as a safe haven.

Bottom Line

Given the current bearish scenario, investors might feel like they have hardly any options in the mining market. But this bearishness can prove to be a good entry point as the space can hold up well in future ruling out the near-term concerns.  Hence, mining ETFs might be worth a closer look by some investors who have a high risk tolerance.

This article is brought to you courtesy of Eric Dutram.

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