Amid rallies for riskier assets late in 2020, once-hot gold is retreating and those declines are weighing on miners, which often overshoot bullion’s price action in either direction.
What Happened: Over the past month, the largest gold-backed exchange traded fund is lower by 1.38%, and the biggest ETF dedicated to gold miners is more than three times as bad, trading down 5.57%.
That would appear to be a perfect storm in which to embrace the Direxion Daily Gold Miners Index Bear 2X Shares (NYSE: DUST) while ignoring the Direxion Daily Gold Miners Index Bull 2X Shares (NYSE: NUGT).
The bullish NUGT attempts to deliver double the daily performance of the NYSE Arca Gold Miners Index, while the bearish DUST tries to mirror double the daily inverse performance of that index. That index is the benchmark for the largest plain vanilla miners ETF.
Why It’s Important: Clearly, with coronavirus vaccines coming to market and expectations in place that global stocks will trade higher next year, DUST looks like the easy way to go among leveraged gold miner ETFs, but there are reasons to consider NUGT’s rebound prospects.
“While the gold price is experiencing near-term weakness, gold companies are still enjoying ample free cash flow. Many companies increased dividend payouts with third quarter results,” according to VanEck research. “Scotiabank figures the senior and intermediate producers they cover now have an average yield of 2.0%, which, per Bloomberg data, surpasses the average yield of the S&P 500 of approximately 1.5%.”
That’s good news for NUGT, but there’s also a short-term bull case for the bearish DUST.
“Bullion ETP selling suggests that some investors saw gold solely as a pandemic trade, ignoring longer-term economic, financial and other ramifications,” notes VanEck. “With jewelry and central bank demand weakened by the pandemic, gold will likely remain under pressure until ETP flows turn positive. As such, it looks like the current consolidation might continue through the first half of 2021.”
What’s Next: Still, traders shouldn’t ignore NUGT.
“In the longer term, there are unknown side effects from the overall clinical, psychological, social and economic shocks of the pandemic,” according to VanEck. “The legacy of COVID-19 could transform political attitudes, global supply chains, demand patterns, work habits, risk tolerance and business practices. While the news of vaccines is welcomed by all, a return to normal is far from guaranteed. Many risks remain that we believe can drive gold to new highs.”
One more point in NUGT’s favor: Gold historically performs better when a Democrat is in the White House.
Photo courtesy Pixabay.
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