Rate Hike Odds Shine A Light On Leveraged Gold Miners ETFs

As market participants continue resetting interest rate hike expectations to reflect the notion that the Federal Reserve will increase borrowing costs following its December meeting, plenty of rate-sensitive asset classes and sectors are coming under intense scrutiny.

Add commodities and commodities producers to that list, a list that most certainly includes gold and gold mining equities. The November tale of the tape for leveraged gold miners exchange-traded funds reflects the havoc traders expect will be wrought upon gold and bullion-producing companies as the Fed inches closer to higher interest rates.

Commodities And Commodities Producers

Coming into Monday's trading session, the top two ETFs on a month-to-date basis from Direxion's stable of bearish leveraged funds were the Direxion Daily Gold Miners Bear 3X Shares (Direxion Shares Exchange Traded Fund Trust (NYSE:DUST)) and the Direxion Daily Junior Gold Miners Index Bear 3X Shares (Direxion Shares Exchange Traded Fund Trust (NYSE:JDST)), according to issuer data.

Direxion is the second-largest issuer of inverse and leveraged ETFs. DUST and JDST entered Monday with month-to-date gains of almost 34 percent and 25.3 percent, respectively.

Tangible assets like gold tend to do well when rates are low and inflation is high. But when rates rise, investors tend to shift towards interest-bearing assets, with higher yields compared to gold. But on Friday (October 9), gold surged to a roughly six-week high the day after Fed minutes revealed caution about raising interest rates in the near term. Gold miners are inherently a leverage play on the metal. Miner stocks have been compressing for months now. But some investors think the sector may be setting up for a major multiyear move higher, said Direxion in a recent note.

Ah yes, early October. Those were the good ol' days for gold and miners ETFs. Back then, it seemed unlikely the Fed would proceed with raising interest rates this year, and the ensuing speculation to that effect elicited sharp rallies in the Direxion Daily Gold Miners Bull 3X Shares (Direxion Shares Exchange Traded Fund Trust (NYSE:NUGT)) and the Direxion Daily Junior Gold Miners Index Bull 3x Shares (Direxion Shares Exchange Traded Fund Trust (NYSE:JNUG)).

The Changes A Month Can Induce

Fast-forward to November and JNUG and NUGT are Direxion's two worst-performing bullish leveraged ETFs on a month-to-date basis, with losses entering Monday of 21.7 percent and 27.8 percent, respectively.

Likewise, JNUG and NUGT have also been the issuer's two most volatile bullish leveraged funds over the past 30 days, according to Direxion data.

Predictably, traders are once again playing a dangerous game with leveraged gold miners ETFs, as they continue applying the flawed thinking that simply because JNUG and NUGT fall on a particular day means those funds are destined to reverse course the following day. Those were Direxion's top two asset-gathering ETFs last Friday, and month-to-date, the pair have hauled in a combined $33 million in new assets. Conversely, DUST and JDST have lost a combined $53.8 million this month.

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