GDXJ VanEck Junior Gold Miners ETF

Although the American economy seems to be holding its own to start the year, significant risks remain to growth. European worries are always a step away and still high American unemployment and the potential volatility of the presidential election could derail stocks at any time. Thanks to this uncertainty coupled with the lack of inflation in the market, the Fed has seen no reason to test the market with higher rates, preferring instead to be as accommodative as possible. Given these trends, the Federal Reserve announced on Wednesday that it was pushing the prospect of an eventual rate hike further into the future, now until late 2014.

This move extends their previous pledge by more than a year and suggests that the Fed believes more sluggish growth levels are poised to hit the economy over the next few years. The central bank, however, did not release any plans to expand its bond buying program but suggested that it will still be ‘highly accommodative’ since the economy is still up against ‘significant downside risks’. Yet, with that being said, the voting members of the FOMC seem very split on when the first hike should be. Three asked for one next year, five in 2014, and the other four members look to have rates rise in 2015. Thanks to this split and the tilt towards later years, some believe more easing—QE3—could be coming down the pike sooner rather than later in another attempt for the Federal Reserve to jumpstart the lethargic economy (read Three Outperforming Active ETFs).

With this report, investors pushed yields on T-Bills sharply lower with the benchmark 10 year note falling to a yield of just 1.91% before rebounding up close to the 2.00% level near the end of the session. These anemic yields have coupled with the lack of both more easing or tightening on the horizon to push many into commodities and stocks instead. While blue chips were up sharply after the news, arguably one of the biggest winners was in the commodity space with gold (read Five Cheaper ETFs You Probably Overlooked).

The yellow metal gained close to $30/oz. in the session before surging in the final few minutes of the day to soar close to the $1,711/oz mark—and a near $50/oz. gain—in Wednesday trading. This key $1,700/oz. level has not been seen in more than a month, and suggested to some that gold was back on track after its late December swoon.  “The Fed telling us no rate increase to at least 2014 is a sharp rally promoter for gold, as low interest rates to continue will make gold a good alternative hold and not expensive to maintain,” wrote George Gero, a vice president with RBC Capital Markets, in an emailed note.

As a result major gold tracking ETFs—such as IAU, GLD, and SGOL—all rose markedly higher after the release, pretty much matching the gains that front month futures saw in the session. Beyond commodity ETPs though, the biggest winners were in the gold equity space as these securities often trade as a leveraged play on the price of gold. In this space, there are currently four ETFs including the large cap focused GDX and PSAU which added 6.6% and 4.7%, respectively after the report. Additionally, investors saw the small cap-centric GDXJ beat all other funds in the space with a 7.6% return on the day, and then finally the Pure Gold Miners ETF (GGGG) which, ironically, added the least at 4.41% despite only targeting firms that derive a significant majority of their production from gold (read Top Three Precious Metal Mining ETFs).

Meanwhile, in the other key precious metal silver, the report was having an equally impressive impact on ETF prices. This was likely due to the fact that silver is also seen as a hedge against currency debasement but thanks in part to its low price per ounce and more ubiquitous nature, is often subject to greater price swings in a short period of time. This means that the white metal can often outperform on the upside and underperform on the downside when compared to its more stable gold cousin. This trend also seemed to be the case today as silver-backed ETFs such as SLV and SIVR added about 4.14% in the session while the Silver Miners ETF (SIL) gained nearly 4.6% for the day—barely pacing its underlying metal in the period (read Time To Consider The Silver Miners ETF).

Overall, the recent report from the Fed could suggest that gold, and to a lesser extent silver, have seen a near-term bottom, especially given how lengthy the period of heavy accommodation will be in terms of monetary policy. Clearly, the precious metals markets liked the Fed report so further accommodations from a monetary perspective, be it in the form of more asset purchases or bond buying, could add to returns of these ETFs into the future as well and make the late year slide in the products a distant memory.

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Disclosure: Long IAU, gold bullion, and silver bullion.

 
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