Van Eck Gold ETF Mines Volatility
Roger Nusbaum
12/01/09 - 05:00 AM EST
NEW YORK (TheStreet) -- Van Eck is hoping for a repeat of its popular Market Vectors Gold Miners ETF(GDX Quote), an exchange traded fund that has about $5 billion in assets and trades more than 10 million shares a day, as the price of bullion breaks records.
Market Vectors Gold Miners ETF holds companies with proven reserves and revenue, such as Barrick Gold(ABX Quote), Gold Corp.(GG Quote) and Newmont Mining(NEM Quote).
In contrast, the new Market Vectors Junior Gold Miners ETF(GDXJ Quote) focuses on small-cap stocks. The crucial distinction between a junior miner and a big gorilla is that a smaller company may not have gold to mine, or meaningful revenue, just the promise of finding gold at a mine it has the rights to. It reminds me of the quote: "Show me a gold mine, and I'll show you a liar standing above a hole in the ground."
Not that these companies are lying. But it speaks to the potential risk in accessing junior mining companies. Some will hit it big, some will muddle on forever and some will wipe out one way or another.
In the new exchange traded fund, Canada is the largest allocation at 62%, followed by the U.S., with 21%, and Australia, at 11%. It's surprising that Australia doesn't account for more of the ETF or that South Africa takes up only 2.4%. Some of the larger holdings, such as Coeur D'Alene Mines(CDE Quote), at 6.6% of the fund, and Hecla Mining(HL Quote), with 5.2%, may be familiar to investors who follow the group. The junior miners ETF has 38 holdings.
The utility to this type of fund is that it can be used to increase volatility. The Market Vectors Junior Gold Miners ETF gives investors and traders the opportunity to trade mining stocks. But where gold is concerned, there are also times when it makes sense to own the metal.
For insight on how to manage volatility with mining stocks and the precious metal, which can be accessed several ways, including the SPDR Gold Trust(GLD Quote), blogger Clive Corcoran suggests watching the gold/XAU ratio. (The spot price of gold divided by the level of the Philadelphia Gold and Silver Miners Index (the XAU), the longest-running mining stock index.) A reading of 5 and higher is good for gold mines, while 4 to 5 is neutral, and 3 or lower indicates it's better to own the metal. With the ratio currently slightly above six, the implication is that miners are better to hold than the metal.
The news from last week about Dubai World considering a "standstill" on its interest payments may have triggered a risk-aversion trade where everything goes down in price, including gold, except U.S. Treasuries, the U.S. dollar and the Japanese yen. If that slide continues, mining stocks and, in particular, junior mining companies would be viewed as risky. As a result, patient investors interested in this group could have a chance to get in at lower prices.
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