How the Gold Miners Bull 3x (NUGT) ETF Works

The Direxion Daily Gold Miners Bull 3x Shares (NUGT) is a 3x leveraged exchange-traded fund (ETF) that should be used for short-term trades only. In fact, Direxion points this out on its web site: “The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day.”

NUGT comes with a relatively hefty 1.05% expense ratio. But that’s not the only concern. For instance, this fund attempts to track inverse the performance of the NYSE Arca Gold Miners Index via futures contracts, short positions, reverse purchase agreements, options, swap agreements and similar exotic trading tactics. This equals high risk. That said, it’s likely that you’re looking to trade NUGT, not invest in it. If that’s the case, then it’s possible to see substantial returns in a very short period of time. The key is to make sure you’re on the right side of the trend, which makes trading a lot easier due to higher odds of appreciation, which leads to the ability to lock in gains. (For more, see: Introduction to Leveraged ETFs.)

If you’re looking for a debate in the investing world, go directly to gold. Gold hasn’t been performing well lately. Historically, gold has traded inversely to the U.S. dollar. The common thinking is that since the Federal Reserve has been printing money relentlessly, the value of the dollar will decline. That will eventually be correct, but not at the moment. The reasoning is simple. Gold bugs think the U.S. dollar trades on its own merit, such as a stock would. If that were the case, the dollar would be suffering tremendously right now. But the fact is that the value of the dollar is measured versus other currencies. With the European Central Bank (ECB) and Bank of Japan (BOJ) printing money at unfathomable rates, the U.S. dollar should continue to increase in value despite a recent hit. (For more, see: How Do Central Banks Inject Money into the Economy?)

Also consider that gold is a hedge against inflation, not deflation. The United States currently has tens of trillions of dollars in debt. Those debts must eventually be paid. When this takes place, growth will suffer. This substantial deleveraging will likely lead to deflation. This is not bullish for gold. (For more, see: What Moves Gold Prices?)

Furthermore, pay careful attention to China, which is currently in a massive oversupply/overvaluation property situation. In order to maintain a decent gross domestic product (GDP) pace, China continues to build, which only makes the problem worse. The point here is that China will also have to contend with credit excess. If China goes into deflation along with Japan and the Eurozone, then gold isn’t where you will want to be. This might seem impossible right now, but China having to contend with deflation at some point over the next several years is a very real possibility.

Over the long haul, when debts are paid and organic growth returns to the global economy (many years from now), gold should be a screaming buy at discounted prices. Inflation should be rampant in this environment. (For more, see: Hedge Inflation With Gold ETFs.)

Purpose: Tracks 300% of the performance of the NYSE Arca Gold Miners Index

Total Assets: $872 million (as of April 22, 2015)

Average Volume: 11.2 million

Inception Date: Dec. 8, 2010

1-Year Performance: Down -64.30%

Expense Ratio: 1.05%

Top 3 Holdings:

Goldcorp Inc. (GG): 9.90%

Barrick Gold Corp. (ABX): 8.22%

Newmont Mining Corp: (NEM): 6.19%

Gold isn’t likely to perform well in a deflationary environment. However, the expectation of a deflationary environment is based on my own research. Your research might lead to a different conclusion. Either way, NUGT should only be looked at as a short-term trade, not an investment. (For more, see: Does It Still Pay to Invest in Gold?)
 

Dan Moskowitz does not own shares in NUGT, GG, ABX or NEM. He is currently long on DRR, FAZ, TECS, BIS and TWM.