The Disaster Gold ETF Trade No One Is Talking About

Leveraged or geared exchange-traded funds are undeniably one of the most criticized asset classes around. The criticisms are the same today as they were several years. Leveraged ETFs are expensive. They are not buy-and-hold instruments. Over long time-horizons, they deviate wildly from their stated objectives.

All fair, true and redundant points. The point worth rehashing with leveraged ETFs is that, ultimately, the greatest danger is the psyche of many of the end users of these products. It has been lamented in this space that many traders are simply born wired with long only beliefs. The successful ones learn and work their way out of that rigid thinking.

Another important point with leveraged ETFs reminds us of the old Wall Street saying Markets can stay irrational longer than you can stay solvent. Well, we're not saying the market for gold miners ETFs, such as the Direxion Daily Gold Miners 3X Bull Shares (Direxion Shares Exchange Traded Fund Trust (NYSE:NUGT)) and the Direxion Daily Junior Gold Miners 3X Bull Shares (Direxion Shares Exchange Traded Fund Trust) (NYSE:JNUG)), is irrational, but some traders just keep insisting on betting against these ETFs.

Take A Step Back

Consider the following. Over the past month, NUGT and JNUG's bearish counterparts, the Direxion Daily Gold Miners 3X Bear Shares (Direxion Shares Exchange Traded Fund Trust (NYSE:DUST)) and the Direxion Daily Junior Gold Miners 3X Bear Shares (Direxion Shares Exchange Traded Fund Trust (NYSE:JDST)), are down 47.9 percent and 57.8 percent, respectively. Of that is great news for NUGT and JNUG, which are up an average of almost 77 percent over the same period.

Here is the worst part: While no trader should ever be criticized for taking profits, NUGT and JNUG are suffering from outflows while traders are piling into DUST and JDST. The latter scenario, at this point in gold's run, amounts to no more than the application of what goes up must come down while ignoring the aforementioned Markets can stay irrational longer than you can stay solvent advice.

Direxion data indicate that over the past 30 days, average daily outflows from NUGT are over $25.5 million while traders are yanking an average of $3.2 million per day from JNUG. Conversely, average daily inflows to DUST and JDST over the same stretch are $9.1 million and $2 million, according to Direxion data.

Likewise, volume in DUST and JDST is increasing. For the five days ended July 12, turnover in JDST was 61.2 percent above the trailing 20-day average while turnover in DUST was 35.5 percent above its trailing 20-day average, according to Direxion data.

With a combined price tag of $10.60, DUST and JDST may be treating buyers to no more than the potential for a reverse split.

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