GDXJ VanEck Junior Gold Miners ETF

Recent trading has offered up investors a host of data points which look to help set the record straight on economic growth going forward. First, GDP beat expectations coming in slightly above estimates with a 3.0% Q/Q change in SAAR terms. Then to top off this report, Bernanke spoke on the economy in testimony to Congress, moving the markets once again.

In this latest round of comments to the House Financial Services Committee, the Fed Chairman seemed to suggest that recent trends in the unemployment rate were positive for the economy and that more stimulus might not be necessary at this time. While he did note that the economy was presenting mixed signals to the team, the lack of any impetus for more QE seemed to be the focus of market participants at this time. In fact, immediately following the release, stocks trended to the downside, the dollar rose, and the bottom fell out of the precious metals market (read Is The Gold Rally Over?).

In what was described as a mini crash by some, especially given the strong performance in the gold and silver markets to start the year, front month gold contracts fell by about 4.3% while silver contracts plummeted by 6.4% in comparison. Unsurprisingly, this carried over into the ETF world as well, pushing precious metal focused ETFs sharply lower in the process.

In this space, the top three gold ETFs, the SPDR Gold Trust (GLD), the iShares COMES Gold Trust (IAU) and the ETFS Gold Trust (SGOL) all finished the day down by about 4.25% on the news while the result was even worse in the silver market. In this corner of the precious metal world, the iShares Silver Trust (SLV) and the ETFS Silver Trust (SIVR) both fell by about 5.8%, easily leading on the downside in the unleveraged commodity world (read Three Commodity ETFs That Haven’t Surged).

Beyond ETFs that hold the actual metal, the mining sector was hard hit on the day as well. The top dog in the gold mining ETF world, GDX, sank by 3.8% while the fund’s junior gold mining counterpart (GDXJ) saw losses of 5.2% in comparison. Meanwhile, the silver mining ETFs managed to escape without too much in total damages as the Global X Silver Miners ETF (SIL) and the iShares MSCI ACWI Select Silver Miners Investable Market Index (SLVP) lost 2.8% and 2.6%, respectively (see Five Cheaper ETFs You Probably Overlooked).

Today’s performance in the precious metals market contains some interesting implications for investors. First, it should be noted that ETFs holding the actual metal do have slightly different performances when both compared to front month futures contracts. This is because the ETF market stays open later in the day and funds in this space have differing techniques (such as not allocating 100% to precious metals on a daily basis) which can slightly influence returns.

Beyond this, it is interesting to note that equity ETFs in the precious metal market generally had a better performance on the day than their underlying metallic counterparts.  This contradicts the general trend which suggests that mining stocks are more volatile than their corresponding metals; often times investors consider them a leveraged play on products like gold and silver. Thus, when gold and silver are surging, miners tend to outpace on the upside, but they also tend to lose more on the downside as well (see Top Three Precious Metal Mining ETFs).

However, investors with a focus on precious metals will note that this hasn’t really been the case over the past few years as metals have outperformed mining stocks, and by a wide margin. In fact, over the past one and five year periods, it isn’t even close when investors compare top gold ETFs to the biggest gold mining funds, while a similar trend develops in the silver world as well. Yet, with that being said, we may finally be beginning to see a reversal in this trend as GDX has started to catch up to GLD and IAU over the past few months. This suggests that, if recent trends continue, we may see mining ETFs outperform their metal cousins at some point here in 2012, finally ending the streak of underperformance in this ever-popular market sector.

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Author holds gold and silver bullion, IAU.

 
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