NUGT - NUGT: Disappointment Weighs On The Leveraged Junior Gold Mining ETF

2023-11-22 13:49:37 ET

Summary

• Gold prices have the potential to rally higher due to global economic and geopolitical uncertainties.
• The $2,000 level has become a key resistance level for gold, but if it breaks, prices could soar.
• Gold mining shares via Direxion Daily Gold Miners Index Bull 2X Shares ETF offer leverage and have historically outperformed gold during bullish periods, making them an attractive investment option.

Timing is everything. In The Merry Wives of Windsor , William Shakespeare wrote, “ Better three hours too soon than a minute too late .” The quote could be prophetic for the gold market.

Markets reflect the economic and geopolitical landscapes. In late 2023, they remain a mess. The bifurcation of the world’s nuclear powers, the legacy of the global pandemic, wars in Ukraine and Israel, and political divisions in the U.S. and Europe have put the Doomsday Clock at its most dangerous reading in history at ninety seconds to midnight. The faith and credit in governments that provide value to fiat currencies have declined. It should come as no surprise that countries worldwide are buying gold hand over fist, increasing their reserves.

Gold has already rallied from below $300 in 1999 to the $2,000 per ounce level. The current uncertainty and mistrust in governments could mean $2,000 will look as cheap as $300 does today over the coming years. If gold is going to explode higher, the companies exploring for the metal and extracting it from the earth’s crust will likely go along for the bullish ride. Timing the next gold rally is critical, and the Direxion Daily Gold Miners Index Bull 2X Shares ETF ( NUGT ) is a highly volatile and risky trading product that could offer oversized rewards. Risk positions with NUGT require careful attention to risk-reward dynamics and discipline.

The $2,000 level has become the top end of gold’s price range since 2020

Gold first traded above the $2,000 level on the nearby COMEX gold futures contract in August 2020. Meanwhile, gold has only eclipsed the $2,000 level in seven of forty-one months over the past years.

The chart shows the last probe above $2,000 per ounce was in November 2023, and that the $2,000 level has become the upper end of gold’s trading range. The most recent continuous contract high and technical resistance level is $2,072 per ounce, the March 2022 and May 2023 double top high.

Over the past weeks, gold had been consolidating just below the $2,000 level before probing above.

Every dip in gold has been a buying opportunity this century

Gold reached its most significant bottom in 1999, when the United Kingdom auctioned half its national reserves, pushing the price to a $252.50 low.

The chart highlights the pattern of higher lows and higher highs over the past twenty-four years. Gold moved above the 1980 $875 peak in 2008, when it eclipsed the $1,000 level for the first time. Meanwhile, the leading precious metal has not probed below $1,000 per ounce since 2009, and has remained above $1,500 since April 2020. The 2023 low was above the $1,800 level.

Gold has been in a bullish trend for almost a quarter of a century, with every downside correction a buying opportunity.

Gold mining shares exploded on the first move above the $2,000 level in 2020

Gold mining companies invest substantial capital to extract the metal from the earth’s crust. The miners leverage the gold price on the up and downside as production costs determine if mining is a profitable or loss-making business. Therefore, mining shares often outperform the metal on a percentage basis when gold prices rise and underperform during bearish periods.

In 2020, gold exploded 42% from a pandemic-inspired March $1,452.10 low to $2,063 five months later in August.

Over the same period, the VanEck Gold Miners ETF (GDX) product, which holds a diversified portfolio of publicly traded senior gold mining companies, moved 182.9% higher from $16.18 to $45.78 per share.

The Direxion Daily Gold Miners Index Bull 2X Shares ETF turbocharges GDX. NUGT’s fund profile states:

The top holdings of GDX include:

The top holdings of the NYSE Arca Gold Miners TR USD, which NUGT tracks, are likely the same as GDX, as there are a limited number of publicly traded senior gold mining companies.

From the March 2020 low to the August 2020 high, NUGT rallied 396% from $24.15 to $119.80 per share, outperforming GDX and gold on a percentage basis.

Corrections have caused GDX and NUGT to suffer a more significant percentage loss than gold, with NUGT posting a far greater decline than GDX. Since NUGT employs options and swaps to create leverage, time decay erodes the ETF product.

Since 2013, NUGT experienced one stock split and five value-eroding reverse stock splits. The time decay factor is critical, making timing the crucial value factor.

Gold miners did better than gold- The miners offer leverage for three reasons

Three factors make gold mining shares more valuable than gold:

• The investment in mining is speculative as success depends on extracting gold at a lower total production and financing costs than the market price. When prices rise, the returns tend to exceed gold’s appreciation; when they fall, the losses can be greater than gold’s percentage decline.
• Market participants tend to flock to gold mining shares during bullish gold trends. Therefore, a herd of buying often pushes share prices higher because of speculative and trend-following interest. Conversely, bearish periods lead to a herd of sellers, causing the gold mining shares to underperform the metal.
• The limited number of successful gold mining companies can cause blockage and liquidity issues, causing share prices to soar during rallies and implode during selloffs. Bids to buy shares can disappear in falling conditions and offers to sell often evaporate during rallies.

Gold mining shares are naturally leveraged investment vehicles. Leveraged gold mining share ETFs turbocharge performance on the upside and involve increased risks when the gold price and mining shares decline.

If gold explodes higher, leaving $2,000 in the dust, NUGT could be the leveraged ETF that soars

Gold has a lot going for it these days. The tensions on the geopolitical landscape have pushed the Doomsday Clock to ninety seconds to midnight, the closest to catastrophe in history. The United States is the world’s leading economy, but the unprecedented $33.75 trillion debt is a clear and present danger to the U.S. and global economies. Worldwide inflation remains a nagging issue.

Meanwhile, short-term U.S. interest rates rose from zero percent in March 2022 to 5.375% in late November 2023. Rising rates tend to weigh on gold, but the price has remained around the $2,000 level, a sign of underlying strength. The latest inflation data has taken the pressure off the Fed to increase rates further. As rates stabilize and the dollar weakens, gold becomes more attractive as an alternative investment asset.

Governments worldwide have been buying gold and increasing reserves. Central banks purchased 800 metric tons of gold over the first three quarters of 2023, 14% higher than the same period in 2022. Last year, central banks bought over 1,000 tons.

The potential for a BRICS currency with gold backing could increase the precious metal’s already significant role in the worldwide financial system. The bottom line is many factors support higher gold prices that will eventually leave the $2,000 level in the dust as a critical support instead of a resistance level. If gold prices spike higher, expect a herd of buying in gold mining shares. A sudden rally in gold and mining shares could cause NUGT to soar, as it did from March through August 2020.

Timing is critical, and as Shakespeare wrote, “ Better three hours too soon than a minute too late .” A sudden rally in gold, mining shares, and NUGT will mean many market participants will miss the move.

I favor a dynamic approach to NUGT, using price and time stops to control risks. Reestablishing long positions in the leveraged ETF product at higher or lower prices will allow participation when gold finally breaks to the upside. The approach involves accepting small losses in the quest for oversized gains.

NUGT is a highly speculative product, and investors need to fully understand the risks such as time decay and the effect of volatility before investing in it. However, Direxion Daily Gold Miners Index Bull 2X Shares ETF could deliver significant rewards when gold’s rally continues and takes the precious metal to the next stop on the upside. NUGT’s performance has been disappointing on recent rallies, but a sudden parabolic upside move in gold could launch the leveraged ETF product significantly higher.

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