Where’s the Silver Lining with Gold?

Written by Steven Hercenberg   
Thursday, 13 November 2014 00:00

Of all precious metals, gold continues to be the most popular among investors.  Recent strength in the US Dollar along with low inflation, however, have been adversely impacting the price of this commodity since 2011.  For example, since Labor Day 2011, the most widely held exchange traded fund (etf) in gold, SPDR Gold Trust (GLD) price has fallen nearly 40%.  Market Vectors® Gold Miners ETF price (GDX) similarly dropped nearly 75% and Market Vectors® Junior Gold Miners ETF price (GDXJ), 85%. Some pundits expect this trend to continue, others claim that gold is situated for a rebound.

In fact, recent technical indicators identify a silver lining to this cloud for the near term. 

Four technical indicators highlighted in the graph below show why the DIREXION DAILY JUNIOR GOLD MINERS INDEX BULL 3X SHARES (NYSE-JNUG-$3.91) appears poised to rebound near term.  Its Bollinger Band Width (BBW) is beyond its average historical range, the Relative Strength (RSI) Indicator is oversold, the Moving Average Convergence Divergence (MACD) Indicator is oversold.  Moreover, the MACD further signals a rebound in the etf as it enters positive territory. 

JNUG provides daily 3x exposure to a cap-weighted total return index of junior gold and silver mining companies from developed as well as emerging markets. The Index provides exposure to a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company's revenue from gold or silver mining when developed, or primarily invest in gold or silver.  The term "junior" refers to the size of these firms, which are considered to be small-caps as defined by the index provider.  The cap weight is limited to a maximum of 8% per company; the index is reviewed quarterly. As of September 30, 2014 the average market cap of the index was $346.07 million and the median market cap was $293.76 million.

Like most leveraged products, JNUG's exposure is reset daily. The fund is therefore designed to be used as a tactical trading tool.  Tradability is paramount for a tactical tool—which a 3x play on gold surely is. JNUG has good liquidity based on its trading volume and Total Assets.  Leverage ETFs are not designed to track the underlying index over periods longer than one trading day.

The Net Expense Ratio of the Fund includes management fee and other operating expenses, but does not include indirect expenses such as Acquired Fund Fees and Expenses, leveraged interest and brokerage commissions.  The Fund's Advisor, Rafferty Asset Management, LLC has entered into an Operating Expense Limitation Agreement with the Fund, under which Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expense through September 1, 2015 to the extent that the Fund's Total Annual Fund Operating Expenses exceed 0.95%.

Given its narrow trading focus, this ETF would work best as a satellite holding in a diversified portfolio.  We recommend buying JNUG with a target price ranging from $5 to $6 over the next few weeks.

Disclosure: The author, a Goldman Small Cap Research analyst, is long these shares and may elect to purchase more or sell the ETF within the next 48 hours.

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