Top picks 2012: Market Vectors Junior Gold Miners

This ETF tracking smaller mining companies will follow precious metals higher as currencies lose purchasing power.

By TheStockAdvisors Jan 10, 2012 5:13PM
Image: Gold Bars (© Stockbyte/SuperStock)This post is one in a series in which over 50 newsletter advisors share their Top Picks for 2012.

By Gene Arensberg, Got Gold Report

With the smaller, less liquid and more speculative junior miners and explorers having been "clocked" by a fearful market, we think making space in one's portfolio for the Market Vectors Junior Gold Miners ETF (GDXJ) makes sense. 

First, we expect this exchange-traded fund (ETF) to rebound in 2012; long-term, we expect it to respond to higher metals prices ahead.

GDXJ tracks and attempts to replicate as closely as possible, before fees and expenses (reasonably capped at 0.54% per annum), the Market Vectors Junior Gold Miners Index. 

Smaller, more speculative mining companies can be extremely volatile and most are considered riskier than their larger cousins. However, GDXJ spreads the risk out among a basket of nearly 80 companies. 

The small (under $1 billion in market capitalization) to mid-sized ($1 billion to $5 billion market cap) companies in the ETF provide the "food" for majors such as Barrick, Newmont and Goldcorp. Successful junior miners that have put important new deposits of precious metals into production allow the larger companies to replace declining reserves. 

Part of the allure of the smaller companies is their potential to be gobbled up, and through GDXJ investors gain exposure to many of the companies on the majors' shopping lists.   

As more and more people come to understand that governments worldwide have chosen to print oceans of their fiat currencies, literally debasing them by increasing the quantity of "money" in the global financial system, wealth is migrating to precious metals in order to preserve purchasing power. 

Gold and silver are apparently moving higher in price, but in reality what is happening is that dollars, yen, euros and other fiat currencies are losing purchasing power. We believe that worldwide weakening of paper currency is bound to continue and will likely accelerate in the near future. 

The "cheaper" dollars are not that good for public confidence, or savers, or people on a fixed income, but they are good for some things. Cheapening the currency makes it easier for the government to pay the enormous national debt racked up by irresponsible elected representatives. Meanwhile, higher prices for gold and silver should be good for companies that look for and produce them.

Interestingly, gold has corrected as much as $360 or 18.8% since it topped in early September near $1,924 an ounce. This correction and heightened fear by investors as Europe undergoes a tortuous restructuring of its mountainous debt is in large part why GDXJ has sold off more strongly than the indexes that track the larger miners.

The volatility of the smaller mining company ETF is roughly double that of indexes of the larger mining companies. So when confidence in the junior mining sector returns, the very high volatility should work to the upside as it did to the downside in late 2011.

With a reasonable expense ratio, a wide sampling of some of the most promising junior miners and explorers and, arguably, a beaten down share price, we’re looking for a return of confidence by investors in mining shares and intend to accumulate GDXJ.

 Steven Halpern's​​ offers a free daily review of the favorite stock ideas of the nation's top financial newsletter advisors.

Tags: GDXJgold


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