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Gold juniors ETF ought to lift this whole asset class

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The first-ever gold juniors exchange traded fund is only two months old but already attracting attention among investors. Its owners will be hoping that Van Eck’s GDXJ will map the progress of gold ETFs like GLD in promoting its asset class.

GLD owns more physical gold than many countries, and has been a major force in making gold easy and cheap to own, without the problems of security and storage. Buyers can own their gold online in a brokerage account and trade it instantly at anytime.

Gold juniors

For those unfamiliar with smaller gold and silver stocks these divide into metal producers and explorers, and many mix both activities. They are a devil to analyze as data is hard to verify and the claims made by the companies always over-hyped.

However, in past gold booms the real money has been made by investing in these junior stocks, so long as you stick your pin in the right place. Thousand-fold increases are common when a junior finds gold, but then very few do.

On the other hand, the juniors are highly leveraged to a rising gold price. Exploration companies own claims to mineral rights on parcels of land, and these claims surge exponentially in value in a gold boom, whether or not there is actually any gold in them there hills.

In theory then owning the juniors is the very thing to do if you are confident that a big hike in the gold and silver price lies ahead. You have leverage to the price of precious metals without actually having any leverage in the form of debt.

2010 golden year

And for 2010 we have experts from Merrill Lynch to Goldman Sachs and gold bugs like Jim Sinclair saying that this is year is great for gold.

But if you are not confident about picking winners among the juniors then the diversification offered by the GDXJ is a neat way out. Van Eck has invested GDXJ in 56 small caps from larger firms like Hecla and New Gold to the more obscure like Hong Kong traded LingBao Gold.

That said if GDXJ performs well the real winners will still be some individual smaller gold and silver companies. For if GDXJ proves as popular this year as it probably will be then this will also be the making of fortunes in some individual junior stocks that presently lie in obscurity.

GDXJ’s success will attract investor attention back to this largely forgotten asset class. And GDXJ will pay the price of diversification by missing the biggest killings.


Written by Peter Cooper

January 14, 2010 at 10:52 am

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