ETF Talk: Mining for Gold

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

One of the exchange-traded funds (ETFs) that I have recommended profitably to subscribers of my Successful Investing newsletter is the Market Vectors Gold Miners ETF (GDX). As of the close of trading yesterday, GDX was up 11.28% since I recommended it on June 1.

This ETF seeks to replicate, as closely as possible before fees and expenses, the price and yield performance of NYSE Arca Gold Miners Index (GDM). GDM is a modified market capitalization-weighted index that gives investors exposure to publicly traded companies primarily engaged in gold mining. Stocks represented in the index include a diversified blend of small-, mid- and large-capitalization public companies.

GDX’s top five holdings, as of Oct. 23, were: Barrick Gold Corp. (ABX), 13.4%; Goldcorp Inc. (GG), 11.96%; Newmont Mining, 9.19% (NEM); Yamana Gold Inc. (AUY), 5.19%; and Silver Wheaton Corp. (SLW), 5.15%. The fund’s retreat this month, after running up in September, could offer a strategic buying opportunity for bargain hunters.

Gold mining stocks and gold itself, as I wrote about in last week’s ETF Talk about SPDR Gold Trust (GLD), offer ways to protect your savings against inflation. Gold is a tangible asset that holds its value, if not appreciates, during times of inflation or the threat of inflation.

The tendency for gold to retain its value has led to the precious metal’s description as an “inflation hedge.” However, the gold price historically exhibits long periods where it moves without any apparent link to inflationary trends. For example, in the early 1980s the real price of gold jumped to more than three times its very long-run average. In the 1990s, gold endured a lengthy bear market in which its price fell well below its long-term average. So, you need to understand that investing in gold carries risk.

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Nonetheless, gold’s price tends to rise in inflationary periods, as well as during times when particularly risk-averse investors see limited growth prospects in the stock market. A key reason for the latter tendency is gold’s fairly low correlation with other assets. If you want your portfolio to shine, consider gold or gold mining funds.

In addition, if you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

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