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Different Strokes for Gold Folks

Different Strokes for Gold Folks

Lord knows I have extolled the virtues of owning real physical gold often enough that I’m pretty sure my thoughts are well-known. Yet, gold has many admirers, and not all are as “orthodox” as me. Should you buy precious metals stocks? What about investing in gold futures and options?

There are folks who love to dabble with options and futures, as well as the investors who prefer gold exchange-traded funds (ETFs). Think of an ETF as a first cousin to a mutual fund. It, too, is sold as shares, but instead of buying from and selling to the mutual fund issuer, you buy and sell on the stock exchange. Both represent a basket of assets and have a net asset value, though ETFs also have exchange prices that may differ from NAV.

Now, gold ETFs can be composed of physical gold and/or futures and options. But another play favored by some gold bugs is the gold mining ETF sector. The thought is that, as gold goes, so do the miners. That’s true to a point, but a recent article on the VanEck Vector Junior Gold Miners ETF (GDXJ) reveals how the linkage between mines and their product can go awry.

What is a “junior” gold miner? It’s a mining company that owns one or two mines, which might or might not be operating at any given time. You buy the stock in the same spirit as buying a lottery ticket. If the tiny miner makes a big gold strike, everyone gets rich. It’s unlikely, but it could happen. GDXJ got popular in a hurry because of its novel approach to gold investing.

However, there aren’t that many junior mines out there, and soon the ETF found itself with $6 billion to invest, but no stocks left to buy. It’s solution: It bought shares in its big-brother-ETF, VanEck Gold Miners ETF. Unfortunately, when you counted up all its holdings, GDXJ held enough shares in particular junior mines that it was in danger of triggering takeover rules that would force it to buy shares from all remaining shareholders. Yikes! That’s not what it had in mind, and it had to quickly dump small-miner holdings and invest in mid-cap ones.

Too much drama for me. Investors who want to own real gold should open up an Augusta™ Gold IRA from Augusta Precious Metals and sock away up to $6,500 in pre-tax dollars each year as gold coins. Save the drama for the soap operas – buy gold in an Augusta Gold IRA and worry instead about your golf game.

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