Expect Volatility for This Gold Miners ETF

New York (Dec 24)  With gold prices slumping, it is not surprising that gold mining stocks and the relevant exchange traded funds are doing the same. The Market Vectors Gold Miners ETF (NYSEArca: GDX), the largest and most heavily traded gold miners ETF, has shed nearly a quarter of its value this year.

That is to say it has a bumpy ride for GDX and some analysts expect that volatility will linger for some time. Gold assets look more attractive in a low interest rate environment as the precious metal is more competitive against assets that pay low interest, like bonds. Additionally, if the Fed holds off on further rate hikes, it would suggests the economy is not as strong, which would also help gold attract safe-haven demand.

Even if rates rose a couple basis points, the continued low rate environment is good for gold, which does not pay a yield and would struggle to compete with yield-generating assets when rates rise. Making matters worse for gold ETFs are expectations for soft near-term demand at a time of year when gold demand is usually strong. [Doubters in Gold Rally]

In fact, GDX looks poised to extend a run that has seen the ETF become more volatile than its small-cap counterpart, the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ). [Trouble for Gold Miners ETFs is Coming]

“In general, GDXJ is expected to have higher volatility due to the small cap nature of the companies in the index. The last sharp RV [realized volality] ratio spike was in late 2012 – at the beginning of a sharp drawdown where GDX lost 54% and GDXJ lost 62% between 9/20/12 and 6/21/13.  So far this time, we didn’t have any major drawdown to justify for this volatility anomaly,” according to part of a UBS note posted by Chris Dieterich of Barron’s.

Some analysts argue that the gold miner space looks like a cheap buying opportunity. In July, Morgan Stanley upgraded its outlook on Goldcorp Inc (NYSE: GG), the largest gold miner in the space, pointing to the company’s attractive valuations.

Still, others warn that the link between gold prices and miners is weakening, citing the increased usage of over-the-counter swaps and ETFs as proxies. Moreover, the enterprise value of gold miners relative to reserves and resources is at an eight-year low.

Source: ETFtrends