Stock fund could fall harder than gold if metal price corrects

The miner ETF stalling near its 2008 high could be an ominous sign for gold prices, which some say are due for a pullback after a nearly uninterrupted upward surge since the beginning of August.

Market Vector Gold Miners ETF /quotes/comstock/13*!gdx/quotes/nls/gdx (GDX 54.89, +0.61, +1.12%) lost about 5% last week, falling harder than gold itself as futures prices dropped sharply after rallying close to $1,400 a ounce.

For investors who want to own gold, choosing between a miner-stock fund and a commodity ETF such as SPDR Gold Shares /quotes/comstock/13*!gld/quotes/nls/gld (GLD 129.73, +0.26, +0.20%) is an important decision because they can behave differently depending on market conditions. Tax treatment is also different, which is another important consideration for investors using a taxable account.

?To see any product struggle at highs and break support, at a minimum it is time to become cautious on the holdings,? said Chris Kimble, head of Kimble Charting Solutions, a firm specializing in technical analysis.

Market Vector Gold Miners ETF ?has done very well of late, due in part to the U.S. dollar falling over 15% in the past few months,? Kimble noted in an email.

Yet pessimism about the dollar might be overdone, so ?gold-stock owners should pull at least part of their holdings off the table at this point in time,? the analyst said. If the dollar does rally after falling close to a multiyear low, it would be ?ugly? for gold-miner stocks, Kimble added.

The PowerShares DB US Dollar Bullish Fund /quotes/comstock/13*!uup/quotes/nls/uup (UUP 22.47, 0.00, 0.00%) , an ETF that tracks the dollar?s movement against a basket of foreign currencies, has been in a steep decline on fears the Federal Reserve will debase the greenback in its efforts to jump-start the U.S. economy. However, it hasn?t breached $22 a share, which is roughly the level that has halted previous declines over the past three years.

Gold-miner stocks have been more volatile than the precious metal itself during the credit crunch. For example, Market Vector Gold Miners ETF fell off a cliff in 2008 when the global financial system skidded.

After peaking at close to $57 a share in March 2008, the ETF plunged to under $16 in October of that year. Market Vector Gold Miners ETF has more than tripled in price since bottoming, while SPDR Gold Shares has practically doubled.

Gold miners? fortunes are dependent upon the price of gold, but the stocks are also affected by the companies? price of production and trends in the broader stock market, said Glenn Smith, vice president at Van Eck Global, which manages Market Vector Gold Miners ETF.

Miner stocks are prone to periods of outperforming or trailing gold prices, but the two have a ?fairly close correlation over time,? he said. When gold prices are rising, miners usually outperform slightly, and vice versa when gold is falling or static, Smith noted.
?Game-changer? for gold miners

However, 2008 was a ?game-changer? as the relationship between gold and miners became unglued from investors? flight to quality.

Market Vectors Gold Miners ETF finished 2008 with a loss of 26.1%, while SPDR Gold Shares ended the year with a gain of 4.9%, according to investment researcher Morningstar Inc.

?At the end of the day, gold miners are affected by gold prices and the equity market,? Smith said. ?Gold itself is more of a defensive investment that benefits when investors are seeking safe havens.?

Gold has also experienced a tailwind lately from fears the Fed?s efforts to buy bonds and keep interest rates low may spark inflation. Yet any unwinding of gold?s recent gains could hurt miner stocks more than the metal.

Taxes are another important factor investors need to consider when considering exposure to gold. Long-term gains on SPDR Gold Shares and other ETFs that hold precious metals are taxed at a higher 28% rate because bullion is considered a ?collectible? by the Internal Revenue Service.

Meanwhile, the rate for most investors is currently 15% for gains on stocks, including gold miners.

Several exchange-traded products invest in miner shares, but Market Vector Gold Miners ETF is by far the largest with about $7.4 billion in assets. The fund has an expense ratio of 0.53% and its top five holdings are Barrick Gold Corp. /quotes/comstock/13*!abx/quotes/nls/abx (ABX 45.97, +0.52, +1.14%) , Goldcorp Inc. /quotes/comstock/13*!gg/quotes/nls/gg (GG 42.04, +0.17, +0.41%) , Newmont Mining Corp. /quotes/comstock/13*!nem/quotes/nls/nem (NEM 59.37, +0.15, +0.25%) , AngloGold Ashanti Ltd. /quotes/comstock/13*!au/quotes/nls/au (AU 45.89, +0.38, +0.83%) and Compania de Minas Buenaventura /quotes/comstock/13*!bvn/quotes/nls/bvn (BVN 50.35, +0.92, +1.86%) of Peru.

?The fund has been much more volatile than gold due to two reasons. First, the gold miners have enormous fixed costs. That operating leverage can cause cash flows -- which are the ultimate source of value -- to gyrate wildly,? says Morningstar in its latest analyst report on Market Vectors Gold Miners ETF.[http://www.marketwatch.com]