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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.