ETF MarketPro recently connected with Ed Lopez of Van Eck Global to learn more about investing in gold and the firm’s new fund – the Market Vectors Junior Gold Miners ETF (GDXJ).
ETF MarketPro (ETFMP): Has the investment case for gold changed given the declines in major currencies this year?
Van Eck Global: This year the U.S. dollar has certainly slid against most currencies and in such a scenario gold has historically been a strong performer. Historically, one reason investors buy gold is to protect purchasing power in the face of declining values of fiat currencies and/or inflation expectations. To combat the global recession, the Federal Reserve has tried to stimulate the economy through quantitative easing leading to an increase in money supply. Many believe this has the potential to erode the value of the dollar and possibly lead to high inflation once the economy gets back on track.
ETF MarketPro (ETFMP): How should an investor decide between holding gold and investing in a gold miners equity ETF?
Van Eck Global: To the extent you believe that gold spot prices will rise, you may want to overweight gold equities as they tend to provide more return relative to gold spot. That “leverage”, however, cuts both ways. Equities are more volatile and, in downward trending markets, will generally fall more than gold spot prices. Investing in small- and mid-cap mining companies, such as those found in GDXJ, can be even more volatile than large-cap miners. An investment in such stocks should only be considered if you have a strong conviction about the price trend of gold or a very high risk tolerance.
ETF MarketPro (ETFMP): What was the unmet need in the market that led you to launching GDXJ?
Van Eck Global: There was a need for an efficient way to get exposure to junior miners. These small- and mid-cap mining companies are an important segment of the global gold mining market. The underlying index that GDXJ seeks to track provides exposure to this segment by targeting a global basket of companies with a weighted average market capitalization of approximately $930m (source: Bloomberg as of 12/31/2009). It includes junior miners which are listed in Australia, Canada, China, South Africa, the United Kingdom and the United States, but which also own gold properties around the world.
As global gold production has been dropping and demand has been on the rise, junior miners offer potential as a source of new gold production and takeover targets for larger mining companies. Still, junior miners are very risky investments—many are not in the production phase, have negative cash flow and are particularly vulnerable to the price trend of gold. So, a basket of junior mining stocks may offer investors an efficient way to spread some of the company specific risk across a number of different companies. General market related risk, however, would still be a contributing factor to volatility.
ETF MarketPro (ETFMP): Why would an investor choose to go with a basket of junior gold miners instead a basket of large-cap gold miners?
Van Eck Global: An investor may consider junior miners over large-cap gold miners if they are looking for little extra leverage to the spot price of gold. Junior miners can offer high growth potential, albeit with significant risks. A decision to include junior miners may be part of an overall strategy to diversify an investor’s total gold exposure across bullion and gold equities. By allocating a portion to junior miners an investor can take a speculative position in companies that may become tomorrow’s major gold miners.
ETF MarketPro (ETFMP): Given that the index may include companies that are currently not producing gold, do you expect GDXJ to generate any dividend income?
Van Eck Global: GDXJ did not generate any dividend income in 2009.
ETF MarketPro (ETFMP): How does GDXJ fit with your line-up of other hard assets ETFs?
Van Eck Global: Our line-up of hard assets ETFs provide access to important segments of the hard assets market. GDXJ continues that approach by providing efficient access to a basket of junior miners, which are potentially both a key source of new gold production and attractive takeover targets for more established players in the field.
Nothing herein is intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.
Please note that Van Eck Securities Corporation offers investment products that invest in this asset class. This does not constitute an offer to sell or a solicitation of an offer to buy any securities. An offer or solicitation will be made only through a fund’s prospectus, and will be subject to the terms and conditions contained in such document. To obtain a prospectus, which contains this and other information, call 1.888.MKT.VCTR or visit vaneck.com/etf. Please read the prospectus carefully before investing
Investing involves risk, including possible loss of principal. An investor should consider a fund’s investment objective, risks, and charges and expenses carefully before investing. The prospectus contains this and other information. Please read it carefully before investing.