Gold is on the rise. The commodity has seen a dramatic surge
over the past two months since hitting bottom in late June.
Investing in the metal itself or in a fund like
SPDR Gold Trust Shares (
are both great ways to play this trend.
But considering the historic lows that we've seen in gold
producers, even bigger gains could be made by investing in gold
One of the easiest ways to do this is through the
Market Vectors Gold Miners ETF (
Right now, GDX is the cheapest it's been since 2008.
David Einhorn, the billionaire fund manager, is one of the
biggest GDX shareholders. His hedge fund Greenlight Capital
currently owns 8.8 million shares, making him the fund's
fifth-largest institutional shareholder.
In November 2011, this is what Einhorn had to say about gold
"With gold at today's price, the mining companies have the
potential to generate double-digit cash flow returns and offer
attractive risk-adjusted returns even if gold does not advance
At the time, GDX was trading at nearly $60 a share and the
price of gold was between $1,700 and $1,800 per ounce. Today GDX
is trading around $28, and the price of gold is nearly $1,400 per
These numbers point out the huge disconnect we've seen between
the price of gold and the mining companies that produce
The five largest holdings in the GDX fund make up 45% of the
total portfolio. They are
Barrick Gold (
Newmont Mining (
Silver Wheaton (SLW)
Randgold Resources (Nasdaq: GOLD)
My estimate of a 50% gain is based on a return to $45 share
prices from today's price near $30. This is still well below the
52-week high of $55.
In the meantime, GDX offers a yield of 2%, and its annual
expense ratio is a reasonable 0.5%.
Risks to Consider:
In the past, some gold miners have allocated their capital
poorly, spending too much on acquisitions when gold prices are
high. Also, should gold prices decline dramatically, miners could
suffer a permanent loss of capital.
Action to Take -->
An exchange-traded fund like GDX is a conservative way to play
gold miners -- an inherently risky sector. Although this
investment is certainly more speculative, today's low prices have
ironed out some of the risk. Set a tight stop-loss at the recent
low of $24 with a target of $45 per share.
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