Saturday, 20 August 2011

Precious metal mining ETFs GDX and GDXJ poised for recovery

Miner underperformance
The underperformance of  precious metal miners relative to silver and gold bullion has become disgraceful. It has been the subject of many an article lately and illustrious mining investors have been pointing to this anomaly. 

Miners kept on sliding away, dragged down by the stock market sell off during most of the last few weeks, often unable to only respond to precious metals rallying ever higher. Leverage of gold stocks to rising gold prices seems merely a memory of an era almost forgotten.
For those among you who like to quantify this anomaly, I have a blog page where the HUI index relative to gold and the Global X Silver Miners ETF (SIL) relative to silver are being tracked. The page is updated on a regular (weekly) basis. Most blogposts on this topic are referenced therein.

A growing portfolio
As I first wrote about GDXJ on this blog, the ETF had been quoting for barely over six months, sufficient to make some graphs on its performance (GDXJ : De junior goudmijnen tracker). The ETF had a market cap of $1.246 billion back then in May 2010. It was 6 times smaller than GDX which has been around since May 2006. Now the GDXJ market cap has doubled to $2.475 Billion and it gets to 29% of the size of the GDX.
Investors in the GDXJ shouldn’t complain: the ETF has a decent track record and used to have several juniors in its portfolio which ultimately were bid up and taken over by major gold miners. (See the previous posting comparing GDXJ and GLDX)

Investing directly in junior miners or in the GDXJ?
The question has been raised previously. Read following blogposts and the references therein: Investing directly in juniors or through the GDXJ ETF?  Anyhow it is clear that only seasoned junior investors may outperform the GDXJ with their portfolio. The GDXJ is focussing on midcaps ($ 1-5 B market cap), with small caps ($200 M - $1 B) for about 40% of the portfolio. There are relatively few explorer-developers and no early stage small explorers.

Portfolio composition
Van Eck publishes the portfolio composition of the GDX and GDXJ on its website. As these are static images, it is perhaps useful to check the portfolio changes of these ETFs. I have been referring to successful exits for the GDXJ. Since its portfolio also contains a larger number of positions, it can be expected that the portfolio turnover (or “churn”) is more important.
The spreadsheet linked to here, gives an idea of how many “long term holdings” the GDX and GDXJ contain. I include the percentage portfolio share of the May 14, 2010 composition in the rightmost column.
As expected, the GDX is quite “stable” with only one new position added. The long term positions in GDX add up to 79% of the portfolio. Quite often, the portfolio percentage has changed, sometimes significantly.
GDXJ contains 39 out of 72 “long term positions”, adding up to 55.3% of the portfolio. Apart from several exits realized, quite a few newcomers have joined ranks. Moreover, the portfolio percentage of several long term holdings also has changed significantly.
Some of the larger GDXJ midcap positions are also included in the GDX tracker, but they have a small weight in this large cap miner ETF.
The top eight positions in the GDXJ are long term holdings. Among those, the portfolio percentage of First Majestic has increased most significantly from less than 1% to over 4% of total holdings. First Majestic has been one of the outperformers among silver miners. Similarly, the holding percentage of Extorre Gold was raised from just below 0.5% to nearly 2%. Important positions closed were SEMAFO, New Gold, Hecla Mining and Coeur d’Alène. They used to add up to 17.6% of the GDXJ portfolio over a year ago.

Gold Miner Pulse database
In the Gold miner pulse database, fundamental valuation characteristics are provided for the Canadian Gold and Silver miners referenced. The valuation sheets are based on NI-43-101 compliant reserve and resource descriptions of all the properties mined or being explored. The spreadsheet contains a tag in the last but one column indicating the miners that are included in the GMP database. For the GDX it concerns 14 out of 30 positions adding up to 57% of the GDX portfolio.
For the GDXJ there are 27 positions (out of 72) adding up to 43% of the GDXJ portfolio. The top five positions are included in the Gold Miner Pulse database.



Performance
GDXJ started quoting on Nov 11, 2009. I have taken as initial values, the quotes of GDXJ of GDX and Gold Bullion on that day. The time series are indexed using those initial values as to make three graphs start on the same point at 100%. Until mid summer 2010 the  performance of gold bullion and GDXJ was comparable and slightly better than GDX. However, the volatility of GDXJ has always been higher. Juniors rally in late summer throughout autumn 2010 and by early December, GDXJ is the best investment, outperforming both GDX and gold bullion. GDX manages to catch up with bullion. Ever since, gold miners have been underperforming gold during the rally and were beaten up at any hesitation or minor pullback of the gold price. Bullion now is the better investment since GDXJ was launched 21 months ago.


GDX (blue), GDXJ (red) and Gold Bullion (Orange) over 21 months, indexed for comparability.  (Click to enlarge)
 Outlook
Miner underperformance has been lingering on for longer than we could imagine, considering the sustained precious metals rally we have been witnessing. The continuing stock market sell off has been a major drag on miners. Yet valuations relative to gold or silver are already on a near crash level, as all long term supports (even the one that held since April 2009, in the aftermath of the stock market collapse) have been giving way.
Unless the current stock market decline is to aggravate and prolonge into autumn 2011, we are poised for a recovery of the precious metal mining ETFs. 

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