The release of the Fed minutes showed that further
quantitative easing -- a possible QE3, will likely occur if the
economy does not improve. Since the economy doesn't look like it
is improving, traders took this as an indication of likely
additional easing, and creating incentives to get into gold
ETFs.
Prior to this the Fed had implied there would not be further
easing, and as a result gold and gold mining ETFs had not been
performing well.
Emerging Money covered the best ways to play
emerging markets with gold ETFs
previously, as well as
India and its gold market
relative to emerging markets investing. The commentary from the
Fed and the reaction of the markets demands a review of gold ETFs
and where they may be headed.
Two of the most most popular gold mining ETFs are the Market
Vectors Gold Miners ETF (
GDX
,
quote
) and Junior Gold Miners ETFs (
GDXJ
,
quote
). GDX averages 14.6 million shares a day and GDXJ about 3.6
million shares per day. GDX is not heavily invested in emerging
markets, with the majority of its assets in Canada and a decent
amount in Africa (16%) and Latin America (5%). GDXJ has very
little emerging market exposure with 4% in Latin America and less
than 1% in Asia.
Three other gold ETFs have significantly more emerging market
exposure. The Powershares Global Gold and Precious Metals
Portfolio (
PSAU
,
quote
) has more than 17% in Africa, 3.5% in Latin America and 1% in
Asia. The MSCI Global Gold Miners Fund (
RING
,
quote
) has a little more in emerging markets with 14% in Africa, about
6% in Latin America, and about 3% in Asia. The Global X Pure Gold
Miners ETF (
GGGG
,
quote
) has the highest total exposure to emerging markets of the three
with 20% in Africa, approximately 3% in emerging Asia and about
3% in Latin America.
But as previously discussed, these three gold ETFs are
not very liquid, trading only a handful of shares per day, and
are highly correlated to GDX and GDXJ. Until they begin to trade
more and exhibit differentiating characteristics attributed to
their higher exposure to emerging markets, best to stick with GDX
and GDXJ.
The chart below is of the SPDR Gold Trust ETF (
GLD
,
quote
), by far the most traded of gold ETFs. For as long as gold has
been in a bull market there have been commentators asserting the
trend is ending. Looking at gold fundamentally, as a hedge
against a declining dollar and as a necessary and
increasingly acquired part of most nation's currency reserves
(among other reasons), the price should be supported by continued
buying and holding. Technically, as illustrated below on the GLD
chart, despite a lot of recent volatility the long term bull
trend is intact. Factor in yesterday's Fed comments and the case
for gold gets stronger.
As the case for gold is strong, so is the case for investing
in gold miners through gold ETFs. The chart below is of GDX
compared to GLD. Gold miners have lagged the price of gold for a
long time. The price of GDX is well off the all-time
high achieved last summer of just over $1900 per ounce. But
while gold is also down since then, GDX has dropped much
further.
The next chart is of GDXJ compared to GLD. GDXJ invests in
smaller miners, many of which are still in the exploratory phase.
These stocks, and in turn the ETF, are more volatile than the
bigger capitalization stocks in GDX. The chart is similar to the
GDX/GLD chart but GDXJ is down much further than GDX.
The opportunity with gold ETFs is the disparity between gold
miner performance and gold performance. If gold continues to
rise, it is reasonable to expect GDX and GDXJ to do so as well.
The returns for the mining ETFs have the potential to be much
greater than that of an ETF like GLD. Ownership of gold is
unnecessary. Until there is a better alternative for emerging
market gold investors the better option is to stick with GDX and
GDXJ.