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Aug 8, 2016

S3 BLACKLIGHT: Shorts are Stampeding into the GDX Gold Miners ETF

With the price of gold up almost 26% this year, inflows into the major gold ETF’s have been significant. The Spider Gold Shares ETF (GLD US) had inflows of $13.1 billion this year, up 45% to $42.1 billion, and the VanEck Vectors Gold Miners ETF (GDX US) had $1 billion of inflows, up 10.3% to $10.8 billion.

Gold is an attractive alternative investment in this low and negative yield environment. And with only one Fed hike expected in 2016 there is very little risk of higher opportunity costs for holding gold as an asset in the coming year. With the increased worldwide gold demand the GLD ETF is up 26% year to date while the GDX is up 124% year to date.

Some investors may think that this year’s crude and precious metals rallies may be overheating which is reflected by the increase in short interest in both the GDX and GLD ETF’s. The GLD short interest is up 12.5%, increasing from $891 million in 2015 to $1 billion. The GDX short interest is up 392%, increasing from $408 million in 2015 to $2 billion.

The gold miners ETF GDX, is essentially a leveraged bet on gold prices. The GDX rises and falls not only on the actual price of gold but also on the short term and long term profitability of its constituents. With the rising price of gold making higher cost producers profitable there has been a dramatic increase in positive earnings withn the GDX constituents. The risk or course is that if the price of gold falls, the future earnings of the higher cost producers would be immediately negatively affected. Miners such as Agnico Eagle (AEM US), Silver Wheaton (SLW CN), Iamgold Corp (IMG CN) and Kinross (K CN) who are up over 100% on the year may face an abrupt price reversal if the gold rally stumbles.

With GDX short interest breaking through the $2 billion level for the first time and hitting historical highs which are almost 3.5 times 2015 average short interest the S3 Crowding Indicator, a measure of the magnitude of short activity relative to market cap and float, showed us crowded events in early July and early August. The S3 Velocity Indicator, a measure of the real time relative change in shorting activity, turned sharply upwards in August signifying that the momentum in shorting the GDX ETF is peaking and should continue in the near term.

For more information on the above analysis, please contact:

Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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