The Gold Miner ETF $GDX, GDX/$GLD (Priced in Gold), GDX/$SPY, GDX/$TLT Are All Crashing ($WTF?)

Nobody seems to like the gold miners these days. $GDX, the gold miner ETF, is down 18% YTD. But it's interesting that GDX/SPY, GDX/TLT and even GDX/GLD are also crashing (GDX priced in the S&P 500, 20+ year Treasury bonds, and even gold). So are the gold miners the new overleveraged TBTF banks? Or are the gold miners undervalued here based on the GDX/GLD ratio.

Since gold miners are still operating companies tied to the price of gold and/or their hedges, there is still the risk of asset write downs and earnings crashes, which, if severe, could violate debt covenant ratios. According to Bloomberg,

Newcrest Mining Ltd (NCM).’s decision to write down the value of its mines by as much as A$6 billion ($5.5 billion) will lead to the biggest one-time charge in gold mining history. It also heralds pain for competitors.

Barrick Gold Corp. (ABX), the biggest producer, Newmont Mining Corp. (NEM) and Gold Fields Ltd (GFI). may be next, according to Jefferies International Ltd.

According to Benzinga, Credit Suisse downgraded Barrick Gold to Neutral from Outerperform and lowered its price target to $20 from $36. But some fund managers including John Paulson of Paulson & Co., John Hussman of the Hussman Funds, and Frank Holmes of U.S. Global Investor believe that gold mining stocks are undervalued here. Here are the charts. GDX and the GDX ratios definitely look like falling knives, but continue to watch for a base.

There are a few forces at work here. The Fed might taper off QE (slow down the dollar printing press) towards the end of the year depending on incoming economic data, which could increase treasury bond yields further and real yields. But there's also the risk of another recession given that deflationary forces are still in the economy. The last chart shows GLD vs. GDX from the 2007-2008 recession to today. I'd like to put that chart up against the monetary base.

GDX vs. GLD / 2008 vs. 2013

Charts courtesy of
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