GDXU: If Gold’s Bullish Trend Continues, This ETN Could Soar

In a September 26, 2022, article on Seeking Alpha, I highlighted the MicroSectors Gold Miners 3X leveraged ETN product (NYSEARCA:GDXU). Nearby COMEX gold futures were at the $1,658.50 level that day, and the GDXU was sitting at $2.60 per share.

Triple-leveraged products routinely undergo reverse splits, and GDXU is no exception. The split-adjusted low from September 2022 was $21 per share after a 10-1 reverse split. In the Seeking Alpha article, I explained that gold mining shares tend to provide leverage to the gold futures price, and the even more leveraged GDXU is “not for the faint of heart as leverage comes with a steep price tag for GDXU.” The 10-1 reverse split is a glaring example of the risk, but on January 17, the ETN was approaching a price triple the split-adjusted late September 2022 level.

The early days of 2023 have been golden for the precious metal with thousands of years of history as a means of exchange, store of wealth, and industrial commodity. The mining shares and leveraged products have delivered even more dramatic percentage gains over the past months.

Gold’s impressive gain

After reaching a record $2,072 high on the nearby COMEX gold futures contract in March 2022, the precious metal ran out of upside steam.

The chart highlights gold’s 22.2% fall to $1,613 six months later, in September 2022, when it ran out of downside steam. A rising dollar and the upward trajectory of U.S. interest rates were a toxic bearish cocktail for the gold market.

Meanwhile, since the September low, gold has made a significant comeback, making higher lows and higher highs, reaching over $1,920 in early 2023, a 19.1% gain. On Tuesday, January 17, gold futures were sitting above $1,900 per ounce. The dollar index turned lower since reaching the highest level in two decades. Moreover, gold’s bullish trend since 1999, when the price found a bottom at $252.50, remained intact despite the 22.2% decline from March through September 2022.

Gold mining shares have done even better

Gold mining shares tend to provide a leveraged return compared to the metal because miners invest millions in projects to extract gold from the earth’s crust and sell it at a higher level than the production cost. The higher gold prices move, the better the return. Moreover, bull market periods in the gold market drive speculators into mining shares, increasing the demand and driving the share prices higher.

The VanEck Gold Miners ETF product (GDX) holds a diversified portfolio of the leading publicly traded gold mining companies. The diversification mitigates idiosyncratic risks like management, geographical location of mines, and problems associated with specific mining properties. The most recent top holdings include:

At $31.65 per share on January 17, GDX is a highly liquid ETF with over $13.7 billion in assets under management. GDX trades an average of over 21.45 million shares daily and charges a 0.51% management fee.

The chart illustrates GDX rose from $21.52 in late September 2022, when gold futures reached the $1,613 low, to $32.75 per share in January 2023 as gold traded over the $1,920 per ounce level. The 52.2% gain outperformed the price action in the metal.

Junior gold mining companies tend to experience even more volatility, magnifying the price action in the senior miners because they explore for gold and attract more speculative interest. The GDXJ ETF holds a portfolio of the leading junior gold miners. At $39.25 per share on January 17, GDXJ had over $4.22 billion in assets under management. GDXJ trades an average of nearly 5.5 million shares daily and charges a 0.52% management fee. From late September 2022 through January 2023, GDXJ outperformed gold and GDX, moving from $25.80 to $40.55 per share or 57.2%.

Gold, GDX, and GDXJ were not far below the recent highs on January 17, 2023.

The factors that point to a golden 2023

The following factors support gold prices in early 2023:

• The dollar index fell from 114.745 in late September 2022 to 101.465 in January 2023, an 11.6% decline. A falling dollar tends to support gold prices.
• The U.S. 30-Year Treasury bond futures rose from 117-19 in late October to a high of 132-11 in mid-December. The TLT ETF that reflects the path of least resistance of 20+ year U.S. Treasury bond prices rallied from $91.85 in late October 2022 to $109.68 in December 2022, a 19.4% gain. Rising bonds and falling interest rates are bullish for gold prices.
• In 2022, central banks worldwide bought gold at the fastest pace in more than half a century. Meanwhile, reports of the purchases are likely understated as Russia and China consider activity in the gold market and reserve levels as state secrets and national security matters. Therefore, buying was probably higher than reports. Central banks, monetary authorities, and governments validate gold’s role in the worldwide financial system, and last year’s purchases only fortified gold’s position as an economic asset.
• The bifurcation of the world’s nuclear powers has wounded the U.S. dollar’s role as the global reserve currency. As the U.S., Europe, and allies put sanctions on Russia in 2022, the Russians retaliated by declaring that 5,000 rubles were exchangeable for one gram of gold. The move that established a gold standard lifted the ruble’s value against the U.S. dollar from the March invasion-inspired low even as the U.S. currency was rallying against other world foreign exchange instruments.
• Since the 1999 bottom, the trend in gold has been bullish. Every correction has been a golden buying opportunity leading to a new record nominal high. The most recent new peak came in March 2022, and the correction that followed found another in a long series of higher lows.

In 2023, gold remains a highly attractive asset, and the price action since the September 2022 seems destined to reach another new high. The optimal approach to gold has been buying the metal during its periodic downside corrections.

GDXU: A leveraged product that has outperformed gold, GDX and GDXJ

With their fingers on the pulse of markets, nimble traders know that timing is the most critical success factor. While GDX and GDXJ turbocharge gold’s price action, the MicroSectors Gold Miners 3X leveraged ETN product (GDXU) can add rocket fuel to gold when the price of the metal and mining shares rally.

GDXU’s profile states:

The S-Network MicroSectors Gold Miners Index holds leverages positions in the GDX and GDXJ ETFs:

At around $55 on January 17, GDXU had $1.5 million in assets under management. Despite the ETN’s low assets, it trades an average of 231,938 shares daily and charges a 0.95% management fee.

The chart shows the 192.5% rise in GDXU, which rallied from $21.00 in late September 2022 to a $61.43 per share high in January 2023.

GDXU turbocharged gold, GDX, and GDXJ over the past months, but this ETN is not for the faint of heart.

Decay is the reason this is a short-term trading product

Leverage comes at a steep price, time decay. Leveraged products use options and other derivatives to create the gearing that rewards market timers when prices move in a favorable direction and punishes them when they get the direction wrong.

GDXU began trading in December 2020, and the price action shows that holding this ETN as a long-term investment is a dangerous and losing proposition.

The chart shows the $322.30 high in GDXU in January 2021 when the gold price reached the $1959.90 level, only $39 above the recent $1,920.90 high. At $1,910 on January 17, gold dropped only around 2.5% from the January 2021 high in early 2022, but time decay sent the GDXU product 80.9% lower over the period, with the price dropping from $322.30 to the recent $61.43 high.

GDXU’s routine reverse splits mean it will likely wind up a dust collector in long-term holder’s accounts as the shares shrink with each time decay-inspired split. While this ETN is not a good investment in gold for the long term, it can be a great short-term trading instrument.

I’m bullish on gold and expect the price to rise to new highs, but using the GDXU to participate requires both a price and a time stop to protect against the time decay that makes it a wasting asset over time.