Fed Moves and Geopolitics: The Tug-O-War for Gold Miners
Editor's note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.
Gold has been on quite the run lately, rising above $2,500 an ounce for the first time ever. The rally isn’t exactly surprising since the yellow metal is enjoying some favorable tailwinds, including global geopolitical tensions, expectations for Federal Reserve rate cuts, and central bank buying.
ETFs that provide exposure to physical gold have also driven demand in recent months, Yahoo Finance reports.
Although gold gets a lot of attention, precious metals miner stocks are another way to trade it. Gold miners often move more than gold in both directions in part because their operating expenses are relatively constant.
Like gold itself, NYSE Arca Gold Miners Index* is at a critical point that may result in a breakout or correction after the recent run. Gold miners reacted favorably to Fed Chair Jerome Powell’s speech at Jackson Hole that the “time has come for policy to adjust.” Looking ahead to the September Fed meeting, the main question now is if the Fed will cut by a quarter-point, or go big with a half-point cut.
Below is a daily chart of the NYSE Arca Gold Miners Index as of August 23.
Source: StockCharts.com, August 23, 2024.
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results.
The blue line represents the 50-day moving average*
The Bull Case for Miners: Safe Haven and Rate Cuts
Rising geopolitical tensions often push gold prices and mining stocks higher, and that could be the case recently, with investors focused on the war in Ukraine, the South China Sea, and the Middle East.
Gold also tends to have an inverse relationship with the U.S. dollar, which has been weak lately against most major currencies as the Federal Reserve is expected to hike at the September meeting. Central banks also seem to be playing a role, buying an estimated 10% of all gold produced by the mining sector, MarketWatch reports.
Therefore, bulls on miner stocks would like to see an aggressive half-point cut at the September Fed meeting, which would likely put more pressure on the dollar. They would also appreciate central banks continuing to step up to the plate and buy gold.
The Bear Case: A Strong Dollar and Rising Yields
On the flip side, gold and miners have been strong lately and may be overdue for a pullback. It wouldn’t be a shock for both to take a breather at these potential breakout levels if traders begin to lock in profits.
Bears would like to see the dollar strengthen because it makes gold more expensive for foreign buyers, reducing demand. Additionally, rising interest rates could potentially hurt the precious metal because it would get more competition from bonds that pay interest, unlike gold.
And if geopolitical tensions cool somewhat, it could cause a rotation out of safe-haven assets like gold, potentially impacting the mining stocks.
Upcoming Catalysts to Watch
- September Fed Meeting: The next Federal Open Market Committee (FOMC) meeting is scheduled for mid-September, with the policy announcement on September 18. The Fed’s decision on rates and language on the outlook will be closely watched by traders because they can impact the dollar, rates, gold, and miners.
- August Employment Report: The non-farm payrolls report is typically released on the first Friday of the month, so circle September 6. The August jobs report could set the tone for the crucial Fed meeting later in the month.
- Inflation* Data: Gold and miner traders keep a close eye on inflation data because gold is traditionally seen as an inflation hedge. The next monthly Consumer Price Index (CPI)* data for inflation is expected on September 13.
Leveraged Bull and Bear Miner ETFs
The Direxion Daily Gold Miners Index Bull 2X Shares (Ticker: NUGT) and Direxion Daily Gold Miners Index Bear 2X Shares (Ticker: DUST) seek daily investment results, before fees and expenses, of 200%, or 200% of the inverse (or opposite), respectively, of the performance of the NYSE Arca Gold Miners Index.
For traders looking for more speculative ideas in smaller cap miners, consider the Direxion Daily Junior Gold Miners Index Bull 2X Shares (Ticker: JNUG) or the Direxion Daily Junior Gold Miners Index Bear 2X Shares (Ticker: JDST). These funds seek daily investment results, before fees and expenses, of 200%, or 200% of the inverse (or opposite), respectively, of the performance of the MVIS Global Junior Gold Miners Index*.
*Definitions and Index Descriptions
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
The NYSE Arca Gold Miners Index (GDMNTR) 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.
The MVIS Global Junior Gold Miners Index (MVGDXJTR) tracks the performance of foreign and domestic micro-, small- and mid-capitalization companies that generate, or demonstrate the potential to generate, at least 50% of their revenues from, or have at least 50% of their assets related to, gold mining and/or silver mining, hold real property or have mining projects that have the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.
One cannot directly invest in an index.
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. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Passive Investment and Index Performance Risk, and risks specific to investment in securities of gold and silver mining companies and the mining and metal industry. Because the Funds’ Index is concentrated in the gold mining industry and may have significant exposure to assets in the silver mining industry, the Funds will be sensitive to changes in the overall condition of gold- and silver-related companies. Competitive pressures may have a significant effect on the financial condition of gold- and silver-related companies. In addition, for the Direxion Daily Gold Miners Index Bull 2X Shares, Daily Index Correlation Risk, and for the Direxion Daily Gold Miners Index Bear 2X Shares, Shorting or Inverse Risk and Daily Inverse Index Correlation Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.