A Bold, Bearish Call On Gold Miners

It's nice when markets perform as expected. That's what's happening with gold and gold miners stocks and exchange traded funds this year.

The SPDR Gold Shares GLD, the world's largest gold-backed ETF, is up 22 percent this year. That has spurred the Market Vectors Gold Miners ETF GDX, the largest gold miners ETF, to a year-to-date gain of 88 percent. With GDX up that much, it should not be surprising that the Direxion Daily Gold Miners Bear 3X Shares DUST is down nearly 94 percent and was recently reverse split 1-for-10. 

Traders that have had the fortitude to hold on to DUST's bullish counterpart, the Direxion Daily Gold Miners Bull 3X Shares NUGT, have been rewarded to the tune of a four-bagger, meaning NUGT has more than quadrupled this year.

In other words, it has been wrong to bet against gold miners, at least to this point in the year and calls to do that have been misplaced. However, the time could be right to consider a short-term play on DUST.

“It is safe to say that the vast majority of fast money and day traders who traffic in the VanEck Vectors Gold Miners ETF (GDX), or any levered Gold Miner ETF, do not have a strong grasp of arithmetic when it comes to the probabilities of super-forecasting the Fed hiking cycle,” said Rareview Macro founder Neil Azous in a recent note.

Related Link: A History Lesson With Gold ETFs

Gold and gold miners have been supported by the rash of negative interest rate policies throughout the developed and the Federal Reserve's reluctance to raise interest rates this year.

Further underscoring the strength of gold miners ETFs this year is this anecdote: Of the top 11 non-leveraged ETFs on a year-to-date basis, nine are either gold or silver miners ETFs. However, there is Brexit risk for gold, as in if Great Britain opts to remain in the European Union, there is some downside risk for bullion.

“If there is no Brexit, gold will likely fall $50-75 as it enters its weakest period of the year seasonally. We would expect GDX to outperform on the downside if that were to happen,” adds Azous.

Although DUST is the second-worst of Direxion's inverse leveraged ETFs on a month-to-date basis, traders are preparing for the ETF to rally. DUST has averaged over $4 million per day in inflows over the past month, according to Direxion data.