GDXJ VanEck Junior Gold Miners ETF

Over the past few years, investors in gold have undoubtedly been quite pleased with the precious metal’s performance. The yellow metal has roughly doubled in the trailing five year period, while the product has managed to stay above $1,500/oz. with relative ease since mid-2011 as well.

However, while the metal has seen a solid long term performance, gold has been treading water so far in 2012. In fact, the product is actually below where it was six months ago and is now around the $1,670/oz. level as we approach the end of the third quarter.

Meanwhile, from a year-to-date look, gold is up just under 4% on the year, continuing its short-term underperformance of broad benchmarks. This represents a huge reversal from just a few years ago when gold was outpacing global stock markets and rekindling investor interest in the precious metal market (read Three Unlucky Equity ETFs).

Yet the performance of the metal as of late looks downright bullish when it is compared to the funds and companies occupying the gold mining space. Firms and ETFs in this sector have been beaten down by more than 10% on a year-to-date look, suggesting that interest in this segment has pretty much collapsed when compared to the relatively stable performance of gold over the same time frame.

The negative trend in the space also appears to be assisted by how large the gold mining firm is. GDX and GGGG have each lost about 12% so far in the year-to-date period while the Junior Gold Mining Fund (GDXJ) has slid by about 17% in comparison. Even more devastating this year has been the Global X Gold Explorers ETF (GLDX), which has stumbled by 22% since the beginning of January, taking the top spot in the segment for worst performer.

What Happened to the Gold Explorers ETF?

This terrible performance—especially when compared to other gold mining-focused products in the space—is largely due to GLDX’s more risky nature. The product invests in companies that do not actually mine any gold, and instead, only invests in firms that are searching for new gold deposits around the globe (see Has The Junior Gold Mining ETF Lost Its Luster?).

This is an important distinction, because it focuses the fund in on small and micro cap securities that are often extremely volatile on their own. Furthermore, pretty much the entire fund is targeting Canadian companies, meaning that there is some foreign currency risk as well. While foreign currency risk hits the rest of the funds on the list, none of the others are as concentrated or focused in on Canadian dollars, potentially adding to the risky nature of the fund.

Another issue that is impacting GLDX more than others is the lack of true demand for new gold resources. With prices relatively stable for gold, there isn’t as much demand to bring new mines online, curtailing the amounts that major players are willing to pay for the smaller explorer segment. Since this takeover path has pretty much dried up for firms in GLDX, some investors have been selling off their holdings and looking to other corners of the market, or more stable gold products (see more in the Zacks ETF Center).

Still, if investors are forecasting a solid return for gold, the explorers ETF could be a very interesting fund to target at this time. The product has been beaten down over 40% in the trailing one year period and it is far closer to its 52 week lows than its 52 week highs.

This suggests that there could be some serious value developing in this fund, far more so than in the other larger cap ETFs in the gold mining world. Given this, investors who are bullish on gold and are looking for the metal to hit $2,000/oz. could be best served by targeting GLDX over all others in the space.

Not only is the fund trading at a more reasonable level, but it is more volatile and thus likely to react more positively than its large cap focused counterparts like GDX or GGGG. With this trend and gold’s recent move higher, it could be time to take a closer look at the riskiest part of the gold mining ETF world (read Top Three Precious Metal Mining ETFs).

This could be especially true if the Federal Reserve follows through on more QE. This extra round of bond buying could push yields lower on T-bills once more and spark more interest in equities across the board.

Not only that but more intervention by the Fed could decrease investor confidence in the dollar, adding to the recent bullish trend in the gold market. If this continues and gold is able to once again breakout to the upside, investors could see more strength in the gold mining segment, making now an interesting time to play the often unpredictable but potentially lucrative gold explorers ETF for investors looking for another bullish run in the yellow metal.

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Follow @Eric Dutram on Twitter

Author is long IAU, gold bullion.

 
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SPDR-GOLD TRUST (GLD): ETF Research Reports
 
GLBL-X GOLD EXP (GLDX): ETF Research Reports
 
ISHARS-GOLD TR (IAU): ETF Research Reports
 
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