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Leveraged Gold Miner ETF NUGT Up 180% Since Low; More Upside Remains

The 40% plunge in gold miner stocks that occurred in less than a month earlier this year shook a lot of investors out of the sector. Those that hung on or bought the dip have enjoyed a huge recovery.

The VanEck Vectors Gold Miners ETF (GDX) and the VanEck Vectors Junior Gold Miners ETF (GDXJ) are both up 60% since the bear market lows in March.

For leveraged gold miner ETFs, the ride has been even more extreme.

The Direxion Daily Gold Miners Index Bull 2x Shares ETF (NUGT) plunged more than 85% from peak to valley in 2020. It used to be 3x leveraged to movements in gold miner stocks, but had to dial it back to 2x due to illiquidity in the futures markets and an inability to effectively generate the desired leverage in a cost efficient manner. That's reduced some of the volatility in the fund, but it's still a wild ride.

Since its low, NUGT is up an astonishing 180%.

The move has been made despite a relatively low correlation to gold prices. For much of 2020 up until the bear market, the price of gold and gold miner stocks were tracking fairly closely.

Quick Note: Be sure to check out my new ETF Daily Trading Digest, a new feature I recently added to ETF Focus. It's got daily trade ideas and what to watch for in the days ahead.

When the pullback started, investors sought out defensive hedges, but abandoned gold miners altogether.

Gold tends to reflect economic expectations, while gold miner stocks reflect company-specific expectations. Traders figured that miners might have to slow or halt production if the economy experienced a severe downturn and sold off accordingly. Gold, on the other hand, reacted more like a safe haven asset and largely held its value in the decline.

Gold miners stocks, however, have torn it up once the bottom was in. Expectations now are that the economy will start to reopen and continue reopening to greater degrees over the next few months, the Fed will continue to support both the economy and the financial markets to any degree needed and the flood of Fed stimulus will soon spiking inflation.

That last part is key. Imagine what will happen when trillions of cheap dollars hit consumer bank accounts along with record low interest rates and forgivable loans? Once consumers feel more comfortable that the outbreak is easing and are more willing to open up their wallets to non-essential spending, a spike in inflation is almost inevitable.

And gold is the asset to own if you're worried about inflation like I am. I advocated strongly for silver at the beginning of the year given how cheap it was, but that's known more as an industrial metal susceptible to economic swings. Gold is more of a pure play on inflation expectations.

I'd be in gold miner stocks over physical gold here. With economic contraction expectations bottoming out in the near-term, miners will look to begin ramping up operations again. With gold prices slowly headed towards $2000, miners will probably want to push production as hard as they can given the potential profit in it.

If gold is able to make a sustained push into the $1800-1900 range, don't be surprising to see NUGT make a run at the $90 level later this year.

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