The Xchange Blog

The Gold, the Bad and the Ugly.

There’s an intuitive understanding that many traders go to gold when global market risk seems likely. Gold is a protective trade—it’s believed to be solid, secure, and historically more resilient to downward market pressure than equity, cash, and in some cases government bonds. These other cases are almost always inflationary, as gold’s position as a hard asset commodity allows it to keep its value in the face of falling currency and economic pressures driving up prices.

However, gold prices circa 2017 (shown below) have been range bound between $1,200-$1,300 as geopolitics and the global economy waver between persistent anxiety and middling relief.

Gold Prices (1/1/2017 – 7/27-2017)

Source: Bloomberg. Past performance is not indicative of future returns. One cannot invest directly in an index

 

This gold uncertainty surrounding the larger economic uncertainty has done a number on gold mining stocks, which tend to mirror gold’s more dramatic price moves. The chart below shows the NYSE Arca Gold Miners Index (GDMNTR) for 2017 and Direxion’s Daily Gold Miners Index Bull and Bear 3X Shares (NUGT and DUST) that track its performance. You can see the troughs in the chart that represent the wavering demand for the commodity.

Gold Performance (1/1/2017 – 7/27/2017)

Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. One cannot invest directly in an index.

 

The bad news for miners is compounded by readings of the U.S. economy. For one, the Fed’s slow, but steady hawkishness on interest rates signals a preventative measure against inflation. Yet, despite the FOMC’s best efforts to anticipate its rise, inflation has actually remained at or near the Fed’s target through much of 2017. According to The Bureau of Labor Statistics’ Consumer Price Index, the Fed’s best indication of inflationary pressure, prices on common consumer goods have consistently risen less than 3% on a year-over year basis through 2017. In fact, they actually fell below the Fed’s 2% benchmark in May and June. Couple that with the cost of actually mining the mineral and you can understand why many prominent gold mining stocks are in a precarious position.

While this may seem like a flat-out warning sign on a gold mining trade, there are indications of potential growth in the industry through increased demand in gold. The U.S. dollar, in which gold is priced, has slowly trended down from the highs it experienced earlier in the year. This could mean more foreign investors will be interested in buying into gold. Additionally, while oil and gas prices have been stagnant through most of the year, some of the supply pressure from OPEC has resulted in commodity price increases, which could aid the price of gold in the short term.

Still, those optimistic possibilities shouldn’t outweigh the current negative indicators holding back the miners. These few positives certainly don’t counterbalance the albatross of an erratic gold price hanging over the industry. If there is one clear-cut takeaway for those eyeing the miners trade, it is that a predictable outcome is elusive.

 

 


Quarterly Performance (as of 6/30/2017)

Ticker Fund Name   1 Mo % 3 Mo % YTD 1 YR % 3 YR % 5 YR % S/I % Inception Expense Ratio (Gross/Net) %
DUST Daily Gold Miners Index Bear 3X Shares NAV 5.07 0.29 -35.71 -20.77 -66.58 -51.59 -40.64 12/8/2010 1.12 / 1.12
Market Close 5.50 0.06 -35.75 -20.61 -66.57 -51.60 -40.65
NUGT Daily Gold Miners Index Bull 3X Shares NAV -10.07 -16.08 -1.56 -70.10 -56.59 -63.02 -61.28 12/8/2010 1.15 / 1.15
Market Close -10.58 -15.85 -0.98 -70.01 -56.59 -63.01 -61.27

* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.90% for NUGT and 0.95% for DUST. The Funds’ Adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with each Fund, under which Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse each Fund for Other Expenses through September 1, 2018, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s daily net assets other than the following: taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses. If these expenses were included, the expense ratio would be higher.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are three times the return of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, Valuation Time Risk, risks specific to investment in securities in the Gold Mining Industry, such as Emerging Markets Risk, Gold and Silver Mining Company Risk, Mining and Metal Industry Risk, and Canadian Securities Risk, for the Direxion Daily Gold Miners Bull 3X Shares, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, and for the Direxion Daily Gold Miners Bear 3X Shares, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

NYSE Arca Gold Miners Index – The is a modified market capitalization weighted index comprised of publicly traded companies that operate globally in both developed and emerging markets, and are involved primarily in mining for gold and, to a lesser extent, in mining for silver. The Index will limit the weight of companies whose revenues are more significantly exposed to silver mining to less than 20% of the Index at each rebalance date. The Index may include small- and mid-capitalization companies and foreign issuers. One cannot directly invest in an index.