The Gold Miner ETF: A Close Look

by: Greg Newton posted on: May 22, 2006 | about stocks: ABX / AEM / AU / FCX / GDX / GFI / GG / HMY / KGC / NEM

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News came late Friday – via a friend’s invitation to the bell-ringing or toe-stubbing or whatever pointless rite attaches to these occasions – that the Market Vectors Gold Miners ETF will begin trading on the American Stock Exchange today, under the symbol GDX.

While it would have been nice to have it a year ago, which is when Van Eck - a fund management company focused on emerging markets and ‘hard’ assets – originally filed to create the ETF based on the Amex Gold Miners Index, its availability will be welcomed by anybody looking for an easy choice in the nearly always volatile world of precious metals stocks.

For this investor at least, no more trying to pick among the (relatively) large-cap unhedged Newmonts or the hedged Barricks, the foreign-based Anglogolds and Gold Fields, or the toxic concoctions brewing among the junior ranks including, but certainly not limited too, the silver miners with a heavy Bolivian weighting in their assets.

But GDX has cleared its regulatory obstacle course at an interesting time, in the most Confucian sense. The index blew off almost 13 percent last week, while GLD, the gold ETF, was off almost eight percent, as the usual suspects argued vigorously about whether the ‘commodities b$%^&’ was over or, like the stock market itself, just undergoing an...ummm...‘healthy correction’ before the ‘inevitable’ next leg up.

Several things:

The Amex Gold Miners Index [GDM], first published in Oct. 2004, is a modified market cap-weighted index comprised of companies involved primarily in mining for gold and silver. The index divisor was initially determined to yield a benchmark value of 500.00 at the close of trading on December 20, 2002. See Homework below for further details.
As covered here, precious metals prices and mining company stocks are highly correlated but will behave differently over just about any time period. Year-to-date, through the close on Friday, May 19, GDM was up almost 15 percent, while GLD was up more than 27 percent. GDM made its closing high of 1246.59 on May 10, with GLD following two days later, closing at 71.12 on May 12; GDM made its low on Mar. 9, at 916.08, while GLD recorded its low of 52.34 on Jan 5.
GDM, with 43 components, is considerably more diversified than the two options baskets – Amex’s Gold Bugs Index [HUI] and the Phlx’s Gold and Silver Index [XAU] – with 15 and 16 components respectively, but is still heavily concentrated. Its 10 largest components account for just under 70 percent of its holdings, compared with 77 percent for HUI, and over 90 percent for XAU (see table below).
While no gold bug – indeed, NakedShorts is a fully-paid member of the ‘barbarous relic’ school – the metal unquestionably has a place in a properly diversified portfolio, especially given the risks of inflation and dollar depreciation currently in the market. My plan is to move individual precious metals stock holdings into GDM over the next few months to maintain a 50:50 weighting of the metal and the stocks at around 7.5 percent of my portfolio.
Noted with interest: It’s unclear just what process the Amex went through in selecting Van Eck as the index licensee, and it’s probably not particularly material to the ETF in question, but it’s hard to believe the exchange couldn’t come up with someone who didn’t have to include this statement in its filings:

In connection with their investigations of practices identified as “market timing” and “late trading” of mutual fund shares, during the third quarter of 2003 the Office of the New York State Attorney General and the SEC requested and received information from the Adviser.

In July 2004, the Adviser received a so-called “Wells Notice” from the SEC in connection with the SEC's investigation of market-timing activities. This Wells Notice informed the Adviser that the SEC staff is considering recommending that the SEC bring a civil or administrative action alleging violations of US securities laws against the Adviser and two of its senior officers…The time period for the Adviser's response has been extended until further notice from the SEC…

And, of course, given that it’s the Amex, the fact that they’ve announced that GDX will begin trading Monday morning should not be taken as set in concrete until the bell’s actually rung. Or the toe’s actually stubbed.

GOLD STOCK INDEXES: A comparison

Stock		GDM	HUI	XAU

Newmont Mining	NEM	13.70	14.45	18.82
Barrick Gold	ABX	9.87		21.26
Anglogold Ashanti ADS	AU	7.65		10.63
Goldcorp Inc	GG	6.50	5.07	8.65
Gold Fields Ltd ADR	GFI	6.32	15.04	9.18
Glamis Gold Ltd	GLG	6.23	5.69	4.54
Freeport McMoran	FCX	6.05	9.67	8.36
Kinross Gold	KGC	4.17	5.38	3.09
Harmony Gold Mining ADR	HMY	4.14		4.47
Agnico Eagle Mines	AEM	3.58	5.89	2.99
Randgold Resources ADS	GOLD		5.73
Meridian Gold	MDG		5.60
IamGoldCorp	IAG		5.21

Top 10 Components (%)		68.21	77.73	91.99
Total Components		43	15	16