Gold mining companies have tracked the price of the yellow metal lower over the past two weeks after risk-on assets received a double-dose boost of positive vaccine news from Pfizer Inc. (PFE) and Moderna, Inc. (MRNA). However, as COVID-19 infections continue to rise and the complexities of administering a shot to large portions of the population begin to surface, investors may once again turn to the safety of gold to hedge against a winter of uncertainty.
- Gold mining exchange-traded funds (ETFs) offer a hedge against uncertainty about the rollout of COVID-19 vaccines.
- The VanEck Vectors Gold Miners ETF (GDX) has oscillated within a descending channel over the past four months to establish clear support and resistance areas.
- The VanEck Vectors Junior Gold Miners ETF (GDXJ) finds a confluence of support from the lower trendline of a descending channel and the 200-day simple moving average (SMA).
Furthermore, ongoing stimulus measures to kickstart the struggling COVID-stricken economy bode well for the precious metal. "We can now see a path forward, but there are still a lot of questions unanswered," Franklin Templeton gold and precious metals fund manager Steve Land told Kitco. "There's still … a lot of work to be done and that probably is going to require a lot of stimulus. As we look forward, there's certainly potential for inflation. There's potential for currency devaluation. That will be positive for gold," he added.
Active traders can gain cost-effective exposure to gold mining companies through the two industry-themed ETFs outlined below. Let's take a closer look at the metrics of each fund and discuss possible trading tactics.
VanEck Vectors Gold Miners ETF (GDX)
With assets under management (AUM) of $16.29 billion and a 0.53% expense ratio, the VanEck Vectors Gold Miners ETF shines as the leader in the segment. The 14-year-old fund holds a basket of around 50 global gold mining companies, with prominent industry names Newmont Corporation (NEM) and Barrick Gold Corporation (GOLD) commanding almost 25% of assets. Trading wise, the ETF turns over more than 21 million shares per day on narrow penny spreads to minimize transaction costs. Despite GDX trading 22.34% higher year to date (YTD), the fund has slipped 10% over the past month as of Nov. 19, 2020. Investors receive a modest 0.51% dividend yield.
GDX shares have oscillated within a descending channel over the past four months to establish clear support and resistance areas on the chart. Active traders should look for buying opportunities at $35.30, where the price may catch bids near the pattern's lower trendline and 200-day simple moving average (SMA). Those who take a long position should consider setting a take-profit order near the channel's top trendline at $40.70 but cut losses if the fund fails to hold above the $34 level.
The expense ratio (ER), also sometimes known as the management expense ratio (MER), measures how much of a fund's assets are used for administrative and other operating expenses.
VanEck Vectors Junior Gold Miners ETF (GDXJ)
The VanEck Vectors Junior Gold Miners ETF seeks to provide a similar return to the MVISA Global Junior Gold Miners Index – a market cap-weighted benchmark made up of small-cap global gold and silver mining companies. Top allocations in the fund's portfolio of 83 holdings include Kinross Gold Corporation (KGC) at 6.82%, Gold Fields Limited (GFI) at 6.12%, and Northern Star Resources Limited (NESRF) at 5.50%. Trading costs are comparable with GDX, with over 8 million shares exchanging hands most days on a 0.02% average spread. GDX holds net assets of $5.89 billion, yields 0.31%, and has fallen 10.47% in the past month. YTD, the ETF has gained 22.17% as of Nov. 19, 2020.
Since early August, the ETF's share price has traded within an orderly 10-point descending channel following gold lower. Those who favor range-bound strategies should look for entry points around $49.50, where the ETF finds a confluence of support from the pattern's lower trendline and the 200-day SMA. In terms of trade management, target a move back to the top of the channel at $58.30 while protecting capital with a stop-loss order placed somewhere below the 200-day SMA.
Confluence is the combination of multiple strategies and ideas into one complete strategy. Confluence occurs when two or more separate ideas or strategies are used together to form a comprehensive investment strategy that is in line with an investor's risk profile and goals.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.