Gold Boom Sets Up Intriguing Clash For Direxion's Gold Miners 2X Bull And Bear Funds

Fear can motivate people to do many things, including apparently sending gold prices to record highs. Amid rising political and economic insecurity, investors both individual and institutional have found comfort and confidence in the precious metal. Still, all markets feature an ebb and flow, creating opportunities for contrarian thinkers.

Regardless, despite the existence of two sides to a story, the gold narrative is unmistakably bullish at this hour. Recently, the spot price of the yellow metal surged past the $3,200 per ounce level, with much of the move attributed to trade war tensions. While President Donald Trump announced a 90-day pause on sweeping new tariffs, he maintained a 125% tariff on Chinese imports on top of an existing 20% duty.

Since China represents the world's second-largest economy, there remains much uncertainty regarding the direction of the ongoing trade war. With gold marching higher amid the chaos, there's little to suggest that investor appetite is fading. In fact, according to the World Gold Council, global physically-backed gold ETFs experienced inflows of $8.6 billion in March alone. With such intense demand, both the metal and the underlying mining complex have soared.

However, not everyone is convinced about the blistering potential of precious metals. Previously, one of the sharpest criticisms of gold came from legendary investor Warren Buffett. In his view, unlike stocks or bonds that produce earnings, generate interest or pay dividends, the commodity offers very little utility.

"Gold will never produce anything … it doesn't do anything but sit there and look at you," Buffett once said.

Furthermore, while gold is rare, it's hardly an asset facing extinction. While the supply is finite, it's also a fact that the world's supply of gold is constantly growing. Per Statista, the amount of gold available to buy and sell is increasing by more than 3,000 metric tons per year.

As well, gold may not have been the strongest performer when considering a longer period. From January 1990 to late 2020, gold gained just over 372%, paling in comparison to the 1,700% return at the time for the S&P 500. In other words, the precious metal may perform swimmingly under certain cynical conditions. Outside of such circumstances, however, the performance can be lackluster.

The Direxion ETFs: Such clashing narratives provide an enticing framework for gold-mining-focused exchange-traded funds. Specifically, optimistic traders anticipating a continued northward trajectory may consider the Direxion Daily Gold Miners Index Bull 2X Shares NUGT. Conversely, those who have a contrarian spirit may find the Direxion Daily Gold Miners Index Bear 2X Shares DUST to be of their liking.

Both NUGT and DUST seek the daily investment results, before fees and expenses, of either 200% (or 200% of the inverse) performance of the NYSE Arca Gold Miners Index. Since both are 2X leveraged ETFs, they allow investors to double down on their speculation.

Such financial products primarily bring to the table convenience. Leveraged and inverse ETFs allow everyday investors to access leveraged or short transactions without having to resort to the complexities – and potentially uncapped risks – of options trading. Instead, Direxion ETF shares (or units to use the proper lexicon) can be bought and sold, much like any other security.

That said, prospective investors must be aware of certain risks associated with NUGT and DUST. First, the gold-mining complex can be volatile. While the underlying asset has performed swimmingly, there's no guarantee that gold's good fortune will translate to a boosted mining industry. Second, leveraged and inverse ETFs are designed for exposure lasting no longer than one day. Any longer and the performance may not track the underlying index due to daily compounding effects.

The NUGT ETF: It's hard to argue with performance, and the NUGT ETF has certainly been performing well, gaining almost 102% of market value on a year-to-date basis.

Shooting up to a price per unit of $70.91, NUGT stormed well above its 20-day exponential moving average, indicative of extreme near-term momentum.
Given the upward zig-zag pattern established since late January, investors should watch for a potential near-term pullback.
Still, volume levels are robust, suggesting sustained enthusiasm for the 2X bull ETF.

The DUST ETF: On the other end of the spectrum, the DUST ETF has struggled for momentum, losing nearly 58% of its value since the January opener.

In a picture of contrasts, DUST at $29.06 sits well below its 20-day exponential moving average, along with the benchmark 50-day and 200-day moving averages.
Thanks to its step-down pattern evident since January, it's possible for the DUST ETF to temporarily pop higher.
Nevertheless, distribution volume is strong, indicating a great fear of betting against gold miners.