Value Trap Underneath Gold Miner Fund GDX

October 30, 2014

Divergence of earnings in the gold mining sector masks risks.

Yesterday was a serious gut check for investors in the mining sector. Is there a knife to catch?

There are charts and there are charts. But there’s no way to parse this one as anything but ugly:

GDX

I’m not a big believer in technical analysis, but I know an awful lot of traders are, which means a lot of folks are looking at the line for Market Vectors Gold Miners ETF (GDX | B-69) and seeing it plow through its resistance, with nothing to support it but “air” here.

So what are the lessons to learn here?

1) Gold Miners Are Volatile

It doesn’t take math to look at the difference between the lines on this chart and pick out the craziest one. I picked GDX as one of my ETFs to rally in 2014, and while that was still a solid call until a few days ago, it’s now looking pretty darn terrible. On a year-to-date basis, GDX is down just over 7 percent. Just this August, GDX was up more than 30 percent on the year.

2) Gold Miners Are Still Companies

Yes, there’s a significant correlation between the price of gold and the performance of gold miners. Consider this graph of the monthly correlations between GDX and the SPDR Gold Trust (GLD | A-100):

 

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