Friday, 27 May 2011

GLDX: the proof of the pudding is in the eating

An earlier posting: “GDXJ or GLDX, what to choose in the Gold Exploring Realm?” has been focussing on the differences in approach and ‘investing universe’ between the two ETF’s.
As GLDX now has a track record of over six months, I wish to discuss how this ETF started off its carreer on the stock market.
In spite of the early May precious metal correction, with silver kicked out off its parabolic ascent, both silver and gold are still considerably higher than six months ago, just after GLDX had been launched.

Major gold mines grossly underperformed gold bullion, not only during the January and May corrections, but even along the gold rally in between, which is quite uncommon. The unhedged gold miners index (HUI) when charted relative to gold dropped out off its trading range it upheld for over 15 months. This ratio is being monitored and updated on a dedicated page: ‘Gold Miner Pulse’ on this blog.

A similar approach is followed here, with GLDX charted relative to Gold.

GLDX relative to Gold
GLDX relative to Gold Bullion, daily observations over 6 months (click to enlarge)
While upholding well until New Year 2011, GLDX was retreating fast during the January 2011 precious metal correction, but strength returns as gold weakness subsides. January and February have seen some deals concluded with Fronteer Gold, Ventana Gold and Capital Gold Corp. being taken over in a short time span. Especially the worsened stock market sentiment early March, aggravated by the Japan earthquake and the Lybian civil war, turned out detrimental for junior gold explorers. We still witnessed GLDX to recover after the mid March correction, yet the ETF can not confirm as the gold rally picks up steam.

Gold ran ahead until the end of April, but the GLDX to gold ratio started sliding well before the onset of the early May PM correction. We’re still waiting for a convincing recovery ever since. Two minor bounce backs are very comparable to those observed for the HUI/Gold ratio.

Are you off any better with junior explorers and developers than with operating and producing miners? This is what I’m trying to find out.

GLDX relative to GDX

GLDX relative to GDX, daily observations over 6 months (click to enlarge)
The December gold rally was highly beneficial for explorers, outperforming major producers, while the January correction was not too much of a problem, with take over plans being concluded. As expected the GLDX/GDX ratio rose sharply after gold weakness subsided by end January. What followed has been plain disappointment. Majors did better as the gold price progressed, they upheld better during the mid March stock market correction and were less affected by the early May sell off with the latest gold correction. The second bounce (last week) seems much less vigorous for explorers than it appears to be for major minors. We seem to be in for a prolonged period of junior and explorer weakness that may well last till after summer.

The GLDX versus GDXJ benchmark
We have been plotting GLDX relative to gold and to major miners. One more benchmark is missing: how does the GLDX performance relate to that of GDXJ?

GLDX relative to GDXJ, daily observations over 6 months (click to enlarge)
During the first few months, you were better off with GLDX. It has a smaller number of miners in portfolio and the impact of the take over activity proved beneficial. Cards were played by mid February and GLDX started underperforming GDXJ. This junior mining ETF contains quite a few silver miners in its portfolio and as the silver bull picked up steam, GDXJ has been taking the lead. By mid April, silver miners were reluctant to react to the parabolic rise of silver bullion and even decline in countertrend as rumours on potential nationalizations in Bolivia and Peru spoil sentiment. GLDX was upholding better than GDXJ at the onset of the May correction though it soon dropped back. The second week of May precious metals were gliding back after what seemed having been a dead cat bounce. GDXJ was beaten down even more than GLDX, with the GLDX/GDXJ ratio temporarily bouncing up on miner weakness.

GLDX does have its strengths and will most likely outperform as the sentiment for gold explorers turns positive. We haven’t seen any of this since mid February. Over the last few months, this ETF has been the worst choice among its peers. Earlier this month, the gold explorer ETF quoted at an all time low beneath $16.

GLDX: daily observations over the last six months (click to enlarge)

Further reading:

More similar papers are linked to in the top section of the list of blog articles.

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