A New Controversy in The Gold Market

1530809-1-eng-gb_gold-etfs-270x190Gold has been one of the most profitable investments this year, increasing 15%, even as the S&P500 is just a few percentage points better than flat.

However, as gold has fallen over the last month because of increased outlooks of a rate hike in summer, there are indications of a new controversy around gold ETFs.

Analysing the two standard ETFs that monitor gold miner stocks, GDX (Gold Miners ETF), and GDXJ (Junior Gold Miners ETF), experts note some mixed indicators.

Firstly, even though gold has fallen, shares outstanding for GDX and GDXJ have increased by 11% in the last one month, thereby indicating that substantial money is flowing into the domain.

Certainly, precious metals ETFs witnessed four continuous weeks of inflows in the week ended May 25th, 2016.

Another sign of bullish sentiment can be viewed in the options market. Investors seem to have increased upside exposure to GDX and GDXJ on the basis of a correlation between the way puts and calls are trading.

On the other hand, the numbers of those betting against the ETF seems to have risen because of an unusually high-level of short interest.

Overall, positioning in gold equity ETFs don’t reflect a clear bullish or bearish scenario, but demonstrates the sector at present is controversial.

The interesting factor is that this bullish scenario in the options market and bearish scenario with regard to short interest are at odds with the overall market perception about the ETF market – that is options normally display a great deal of hedging even as short interest has fallen.

Some market experts believe there is merit on both sides of the coin. According to Mark Tepper, the President of Strategic Wealth Partners, “”Tactically, gold is certainly overbought — it has come quite a long way so far this year, and all this hawkishness coming out of the Fed recently gives it the perfect excuse for a pullback.”

A cyclical trend in the gold market would be good for the investors. The existing scenario could be an excellent opportunity to invest in gold stocks. From a valuation perspective, the stocks have become extremely overvalued. However, if gold continues on the incline, the miners would perform well.

Read AcademyFT review to know more about how Academy of Financial Trading programmes have helped their students. Stay up to date with financial trading news by following AcademyFT on Twitter.


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