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This Popular Gold Investment Is a Snow Job

By Matt Badiali, editor, S&A Junior Resource Trader
Saturday, December 18, 2010

Folks looking to make a fortune in small gold stocks need to be careful: There's a right way to do it... and there are a lot of wrong ways to do it.
One of the wrong ways to do it is by owning one of the world's most popular ETFs right now. The symbol is GDXJ. It goes by the name "Market Vectors Junior Mining Fund." And that name is a snow job.
"Junior" miners are the bloodhounds of the mining world. They are tiny companies that scour the world looking for the next big gold or silver discovery.
And when I say "tiny companies," I mean it. Junior miners are microscopic compared to the popular mining companies you might now. Many junior miners are around $30 million in market value. Compare this to mega-gold miner Barrick, with a market value of around $52 billion. That's more than 1,700 times the size of a $30 million company.
Junior mining stocks are popular with investors and traders because of this tiny size... and because they offer the chance for once-in-a-lifetime gains. When one of these tiny companies finds a big precious metals deposit, the returns are extraordinary. They can turn a modest $5,000 investment into hundreds of thousands of dollars.
That's why, from a marketing standpoint, calling a big investment fund a "junior mining fund" makes sense. But in reality, it's impossible to pull off.
You see, there's no way a big investment manager can place a large amount of money into a tiny gold stock without causing a huge jump in its share prices. Plus, regulators place restrictions on investment companies to prevent them from owning too much of one company. Big investors, like fund managers, can't operate in this sector.
So is GDXJ really trying to invest in junior miners? Let's take a look under the hood...
The average market value of the companies GDXJ owns is $1.6 billion. That's 500 to 800 times the size of most juniors.
GDXJ owns these multibillion-dollar miners because they have the size to handle big fund flows. Real juniors do not. The folks running GDXJ are calling it a "junior" fund because of the huge interest in tiny gold stocks right now.
Don't get me wrong. GDXJ owns a lot of great mining companies. And it's just the nature of selling to give something a name the public will be interested in. You'll probably make good money with this investment if gold and other metals keep rising in price... but it ain't a junior mining investment.
That's actually good news for us: Small investors willing to do their homework and know the best companies in the sector have a big edge. These companies are too small for Wall Street to play around in.
Good investing,
Matt Badiali

Further Reading:

Get an idea of how outrageously successful junior resource trades can be here:
An Unusual Way to Turn $1,000 into $1 Million in Four Years
In January 2005, Paladin Energy was up to 47¢. That's a 4,600% gain from 2003 levels. By the end of 2005, it hit $2 per share… a 19,900% gain in just 30 months.
How to Make 120% in One Month Trading Gold Stocks
Shares of Esperanza soared from $0.25 in summer of 2005 to over $4 by early 2007. That's 1,500% in just over 18 months.
The Amazing True Story of 1,880% Returns in Seven Years
Due to capital appreciation, that original $20,000 has a current value of $327,226. That's a 1,880% return in just seven years.

Market Notes


We're using this week's chart to update the big "gold stock divergence" idea we told you about in June.
To recap, gold stocks started 2010 trading in lockstep with the general stock market. But early this summer, with the robust economics of digging gold out for $500 per ounce and selling it for $1,400 (instead of $900), gold took over... and gold stocks, as represented by the big gold stock fund (GDX), started rising much faster than the general market.
This week's chart compares the gains generated by gold stocks (black line) versus the gains generated by the broad market (blue line) As you can see, gold stocks are up nearly 35% this year... while the broad market is up 11%. And the divergence is getting bigger and bigger. As the gold price remains elevated, expect this trend to continue.

Gold stocks are rising much faster than the general market

Stat of the week

150 metric tons

Estimated 2010 Chinese gold investment demand... a 43% increase from last year's total. Demand was just three or four metric tons 10 years ago.

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