The dramatic fall of gold has created an unlikely winner: inverse gold miner ETFs. As gold records one of the worst weeks in decades, traders are rushing to bet on a decline in gold prices using bearish leveraged ETFs such as Direxion Daily Gold Miners Index Bear 2X Shares (NYSE:DUST) and Direxion Daily Junior Gold Miners Index Bear 2X Shares (NYSE:JDST).
This shows that traders are rapidly shifting from bullish to short positions in gold stocks.
Miners Amplify Pain, Opportunity
The gold miners are more sensitive to gold prices. This means that they are more affected by a fall in gold prices. When gold fell by nearly 10% last week, gold miners fell by more. This has created a situation that makes inverse gold miner ETFs more appealing to traders. This has turned DUST and JDST into go-to tools for traders who are seeking to profit from the fall. Both funds rose 24% and 25% respectively in the past five days.
A major catalyst for this decline can be attributed to a sharp change in interest rate expectations. While markets had previously anticipated multiple interest rate cuts by the Federal Reserve, they are now expecting potential rate increases. This has caused yields to rise and the dollar to strengthen further, which is a double whammy against gold as an asset that does not pay interest.
Furthermore, it appears that institutional investors are also exiting the market. Outflows from the SPDR Gold Trust (NYSE:GLD) are substantial in recent weeks, indicating that this decline in gold is not merely driven by prices but also involves large-scale flows. In the past five days, the fund suffered outflows of more than $2 billion, according to Etf Database.
The decline in gold can also be attributed to a sharp unwinding in a “crowded trade.” Gold and mining stocks had appreciated almost 50% over the last year and subsequently attracted large inflows.
However, as sentiment changes, traders are now exiting in large numbers, causing further losses in mining stocks and further gains in inverse ETFs.
Other than prices and volumes, markets are also concerned about some deeper issues. The Middle East conflict has raised some concerns, which have led to speculation about some oil-dependent countries facing revenue issues, which in turn has raised the prospect, however unconfirmed, of selling assets, including gold.
Whether this actually happens or not, the fact is that this is adding to the selling pressure on gold.
A Tactical Trade, Not A Long-Term Bet
While the move in DUST and JDST signals growing bearish sentiment, leveraged ETFs like DUST and JDST are not intended for long-term bets.
For now, while gold is losing traction, traders are making the most on the other side of the trade.
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