A Case of “Excellent Timing” (?)

We still remember the flurry of ETF issuance in the tech sector that accompanied the final three months of the famous late 1999/early 2000 Nasdaq blow-off. The securities industry will always react to whatever trend is in fashion by offering products that are in line with it – and usually there is a concentration of such offerings right near the end of a trend. Since the gold market is relatively small – the entire gold industry’s market cap is probably only about a quarter of Apple’s market cap alone (this is just a rough back-of-the-envelope estimate, don’t hold us to it) – the appearance of two new Gold ETFs on the scene is worth noting.

According to press reports, ProShares has decided that now would be a good time to offer two new ETFs that will be short junior gold mines:


“Gold miners have been extremely volatile as of late, as gold prices have been punished the sector across the board. And since miners often trade as a leveraged play on the underlying metal, there have definitely been some big shifts in the miner ETF world recently.


Probably, sensing the bearish nerves of the junior gold mining space, ProShares proposed two bear ETFs in this zone. The duo comprises Short Junior Gold Miners ETF and Ultra Short Junior Gold Miners ETF.

Short Junior Gold Miners ETF looks to deliver the inverse results of its underlying  index and is rebalanced daily while Ultra Short Junior Gold Miners ETF seeks to offer the twice the opposite performance of the index. And to obtain the said objectives, the funds put their assets in derivatives and swap agreements.


These ETFs could be interesting picks for short-term traders who want to make a bearish bet on small cap gold miners. The vibes in the overall gold miners’ space is surely downbeat presently. Add to it the likely sooner-than-expected interest rate hike by the Fed as the U.S. economy has been gathering steam since Q2. This concern could further dampen the performance of gold mining stocks.

Further, the reiteration of 10% import duty on gold in the second largest consuming nation India and a prolonged slowdown in China continued to dampen the demand for bullion.  All these concerns should keep gold mining stocks under pressure making the latest proposals by ProShares extremely well timed.”


(emphasis added)

“Volatile” is the financial press euphemism for “going down”. So “Pro-Shares has sensed the bearish nerves” of the junior gold market? How on earth have they achieved this superhuman feat?

Even if we are not able to ascertain with absolute certainty what precisely has made their spider-sense tingle, it is certainly good to know that this latest proposal by Pro-Shares is “extremely well timed”.

Somehow we tend to think that if that proposal had been made in March/April of 2011, it would have been slightly better timed, but that’s just us. Let us take a look at the performance of the gold juniors ETF GDXJ over the past five years:


1-GDXJThe timing of the Pro-Shares offering could be slightly improved by employing a time machine … shorting stuff that is down 83% from its peak could actually turn out to be hazardous – click to enlarge.


This case of “excellent timing” appears to have missed approximately the first 84% of the gold junior sector’s decline. The phrase that comes to mind here is “late in the game”. In fact, chances are good that this is a long term contrarian signal. Obviously, we cannot rule out further declines in the sector, but as we have previously discussed, recent sentiment extremes in gold are giving us good reason to expect an improvement in its medium to long term performance. Gold’s fundamental drivers are a mixed bag at the moment, but chances that these drivers will turn unequivocally bullish in the future again are very good given the monetary policy excesses of recent years.


Short Term Action in Gold, GOFO Update

Friday’s superficially strong payrolls report (we say “superficially strong” because the household survey was far weaker than the establishment survey, showing job losses as opposed to the strong gains in the establishment survey) led to the expected reaction in the currency markets and the gold market, however, gold did not challenge its support at $1,180 again. The action since then indicates that for the moment at least, the gold market is not happy hanging around at prices below the $1,200 mark:


2-Gold 30 minutes, 1 weekThe most active February gold contract, 30 minute candles: after selling off in the wake of Friday’s jobs report, the market has regained its poise quickly – click to enlarge.


We regard the action since the Friday lows as a tentatively bullish sign – it is not the data that are important after all, but the market’s reaction to the data. Note however that another potential landmine awaits in the form of the December FOMC meeting, which is likely to bring us more hints regarding the planned further tightening of monetary policy (even though said tightening may actually never happen).

Lastly, we want to briefly update the situation with gold forward rates, on which we reported recently. In the meantime, GOFO has turned slightly positive again, as can be seen in the close-up chart below, which shows one and three month GOFO rates:



A short term chart of 1 & 3 month GOFO. After a sharp dip into negative territory, gold forward rates have normalized again – click to enlarge.


Thus the temporary shortage in readily deliverable bullion in the London market has obviously been relieved. However, readers should keep in mind that such negative gold forward rates are usually always a short term affair. Nevertheless, they have in the past signaled impending gold rallies. While not all of these rallies were very large or of the long term variety, several obviously were. Here is a long term chart of 1 and 3 months GOFO illustrating this point:




A long term chart of one and three month GOFO. Dips into negative territory are always short-lived, but on several occasions they have represented a meaningful signal – every such dip was followed by a rally, but not all of these rallies have been large ones. Especially the 95-96 and the 1999 events were only followed by short term advances – click to enlarge.


It will be interesting to see whether GOFO’s recent sojourn into negative territory will once again turn out to be meaningful.



When a major financial services company offers ETFs for shorting a sector that has already suffered a decline of 84% from peak to trough, it very likely represents a contrarian signal. Of course it the gold sector will probably continue to be buffeted by short term volatility and as a short term trading instrument such ETFs are certainly useful.

We are not saying that they are not a sensible product, we are only saying that the timing of this particular offering may represent the kind of anecdotal evidence that typically accompanies medium to long term trend reversals. Lastly, the recent short term action in the gold market continues to look encouraging – and the “follow through” buying that was still missing following the post Swiss referendum market reversal may finally be here.



Charts by: StockCharts, BarCharts, Quandl




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3 Responses to “New Junior Gold Mining Bear ETFs – Another Contrarian Signal?”

  • Monty Capuletti:

    Great catch. The analog to this was the financial sector (anyone remember SKF- 2x Short S&P Fncls sector) where inverse and 2x inverse were introduced in 2007/2008…The only (small) difference was the financial inverse ETF were launched only 20-30% off the sector peak. While it worked great for a year or two, SKF is down 99%+ from it’s peak in late ’08, and it is a CERTAINTY, that these Jr miner vehicles await the same fate. In fact, a cursory understanding of the structure of these “inverse” or even worse “2x or 3x inverse” products leads to a mathematical truth- They will asymptotically go to ZERO, ASSUREDLY! Why? Well, the nature of the ETF is that it must rebalance every day to maintain it’s 1x or 2x negative impact as the GDXJ price changes, and since it is going up as miners go down, it is truly always buying higher and selling lower, just to maintain stated leverage, AND BEFORE ANY FEES! What this practically means is that the ONLY way these fraudulent vehicles (2x inverse) can work is if volatility is perpetually increasing, a practical impossibility. For 1x inverse products, the most you can make is 100%, assuming the underlying (GDXJ) goes to ZERO! AGAIN BEFORE FEES…Since that will also not happen, these are DEFINED LONG TERM ZEROS, despite the allure of ST momentum traders. In fact, reading any prospectus of these products explicitly states this, but of course, no “Real” trader could be expected to actually read a prospectus…I actually recently bought GDXJ, and CEF, my 1st gold purchase in 3.5 years and noticed that the short interest in GDXJ is at it’s highest ever!- Not when it was up hundreds of percent in early 2011 from it’s lows a few years prior- nope- as you point out, down 84% and NOW short interest at all time highs. No doubt at least in part from this phenomenon, but also likely a resounding contrarian signal as you suggest…I believe 1 of 2 things will happen- either the GDX/GDXJ will rise many fold over the next few years, or gold is going to $700-$800. Time will tell…

  • Brilliantly stated! Funds are introduced to meet investment demand, which by nature is highest near peaks and lowest near bottoms. Also notice the huge volume in your GDXJ chart in recent months, indicating massive distribution from disappointed holders selling to knowledgeable buyers near a multi-year bottom.

  • Belmont Boy:

    Also contrarian: the 2014 iteration of the San Francisco Metals and Minerals Investment Conference (“The SF Gold Show”), always with representation from well over a hundred small companies and presentations by big-name gold bugs, was cancelled, explicitly due to the bear market. This conference, open to the public, had been taking place annually for about twenty years. See: http://www.metalsandmineralsevents.com/ehome/index.php?eventid=81632&

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