Sizing Up the New Junior Gold Miners Fund

Most people believe that gold only goes up in bad economic times… as a hedge against an inflationary recession, a deflationary depression or protection against dollar devaluation. In the current uncertainty, gold seems to fit the bill perfectly.

However, Blackrock’s Doll explains that gold actually performs best in times when the global economy is recovering and when central bank policies are stimulative. Both the recent Fed meeting and the G-20 Summit confirmed that stimulus is going to continue, a further tailwind for gold investing.

Even if the U.S. has below-trend economic growth for years due to higher-than-desired unemployment, the unprecedented “reflation” stimulus will eventually give way to inflation. Keep in mind, the spot price of gold would need to be more than $2000 per ounce to reach an inflation-adjusted high set in 1982.

In other words, gold is likely to go higher. Pullbacks, corrections and baby bears may all present themselves, sure. Yet the yellow metal is going to work its way higher.

The question for some ETF investors, then, is how to capitalize. Should you simply stake a claim in the Gold Trust (GLD)? It’s simple, straightforward and backed by the physical commodity itself. Or should you invest in the companies that mine for the yellow metal via the Market Vectors Gold Miners Index (GDX); this fund represents the companies that can realize extraordinary bottom line profits as well as top line revenue growth.

Now there’s a third alternative, the Market Vectors Junior Gold Miners Fund (GDXJ). Whereas the big brother GDX is entirely focused on large gold mining entities, GDXJ is focusing on nearly 40 small and mid-sized companies around the world that generate 50% or more of their revenue from gold/silver mining.

The pros and cons of investing in “juniors” are worth discussing. First, if you’ve found the volatility in mining stocks difficult to stomach, you might want to avoid this roller-coaster ride. Not only is the Market Vectors Junior Gold Miners Fund (GDXJ) weighted 70% towards the smallest companies, but quite a few junior miners are non-profitable speculators/explorers; they don’t know if they’re even gonna find “stuff.”

In fact, commodity exploration companies may represent some of the riskiest propositions around; the majority of junior gold miners, even the good ones, aren’t even likely to score a big time deposit.

That said, new deposits must be found to keep up with global demand. As existing mines run out of metals, the junior miners are the primary hope for meeting the world’s needs through new discovery. Think of the importance of tapping new oil reserves and the picture becomes clearer.

There are a few other reasons for the aggressive crowd to pursue Market Vectors Junior Gold Miners Fund (GDXJ). It’s often the case that small fries get gobbled up by large fries at a premium. And if China’s thirst for resources is any indication, M&A in mining may provide huge rewards.

Of course, if you believe the underlying storyline for gold, the decision to invest comes down to genuine risk tolerance. The spot price for gold will probably climb; the share price on GDX will travel a rocky road, yet should produce an upside reward greater than the spot price; GDXJ will journey the most uneven of dirt paths, while seeing some of the most spectacular run-ups in a given cycle.

Market Vectors Junior Gold Miners Fund (GDXJ) has 62% of company exposure to Canada and another 20% in the U.S.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[doubleguns]

When does this hit the market?

2009 Nov 11 09:01 AM

[thotdoc]

When did GLD fully fund with PM,as stated by the author?

2009 Nov 11 09:59 AM

[Doc 224899]

There are two ways to play this: trade shares of the ETF (which is what the vast majority of brokers and personal financial advisers will tell their clients, so a heck of a lot of shares will be traded), or trade shares of the stocks in the ETF's list of holdings. For the time being, I'm doing the latter. IPOs of ETFs are tricky, and ETFs (e.g., SMN) don't always perform like the label implies they will (Jeff's point, again).

If people buy a large volume of GDXJ shares, and they almost certainly will, it will pull up the demand/supply curve for many of these small miners, and share prices of the small miners’s stock will also be pulled upwards. GDXJ share prices should leverage GLD and GDX, all things being equal, and volume of GDXJ shares traded will increase the extent to which the individual small miner stocks leverage the price of gold and leverage the value of the gold miner sector.

In the same way GLD's bullion holdings raise the price of gold when lots of new shares of GLD are bought, an increase in the volume of GDXJ outstanding shares will raise the prices of small miner stocks. I’m betting that will happen in the next week or two, as this new ETF catches on, and it will pull up share prices of the junior miners.

Some of the stocks, like GRS and JAG and NXG, have terrific fundamentals right now, and they should do very well.

2009 Nov 11 03:43 PM

[Jeff Nielson]

I fully recommend that people "read the fine print" on the prospectus BEFORE putting any money into this.

As a "gold bug" I'm all in favor of investing in precious metals miners, however while investors in this fund might THINK that they are just buying into mining companies, the fund-MANAGERS may be BUYING "derivatives".

For those who want more information on this: www.bullionbullscanada...).

2009 Nov 11 07:15 PM

[chux08]

It closed on it's first day above $25 a share. So I'll be setting aside and watching, as for that price I KNOW of better individual gold stocks that have far less to prove than this brand new offering from Van Eck. While it may prove to be a great investment, these first few days will be full of hype. If you feel the need to buy something, I'm sure they did their DD on these companies, so this would be a great place to start your search. Many of these companies that comprise the list would be fine investments individually but until the...excitement subsides a bit, all I'm going to do is add GDXJ to my watch list and let the share price come back towards Earth and reality. No way would I buy here....

2009 Nov 12 03:18 AM

[tipalia]

Doubleguns GDXJ started trading yesterday , go on bigcharts.com to see what happened .

2009 Nov 12 09:08 AM

[tipalia]

chux08 offers a very wise advice. Idid the samething with GOOG ,I watched it and waited for a pull back, the only problem is I am still waiting , watching it. Well you win some and you lose some.

DOC224899 seems to point us towards something that could be very interesting, which one of the three (GRS ,JAG ,NXG) would be your number one choice ?

2009 Nov 12 09:15 AM

[Mayascribe]

tipalia: (JAG) by a long shot. They expect to increase production by 1000% by 2014. That estimate was before Jaguar Mining spent $39M purchasing a plot of land from ailing Kinross. I have not found any other miner on the planet that is making that claim.

I have followed all three for over a year and half. Very volatile!

Here'e their lastest quarterly report: app.quotemedia.com/str...;;topic=JAG

You should see their e-presentation. Terrific @ jaguarmining.com

2009 Nov 12 03:27 PM