ETF Expert

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.  

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

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