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TheStreet Open House

Gold's Rebound in 2014 May Still Have Legs

NEW YORK (TheStreet) -- Securities that lag one year often recover during the following twelve months.

A case in point is the Market Vectors Gold Mining ETF (GDX), which lost 42% in 2013 as the S&P 500  surged 32%. Moving into 2014, the GDX has gained 21% while the S&P 500 has dropped 1.1%. Even more striking is the Market Vectors Junior Gold Mining ETF (GDXJ), which is up 31% this year after declining 53% in 2013.

Both gold ETFs fell on Wednesday as minutes from the Federal Reserve's last policy-making meeting revealed that central bank members are considering a change to the benchmark interest rate as unemployment gradually declines.

GDX owns more mature, larger cap companies that actually produce gold. Holdings include Barrick Gold (ABX) and Gold Corp. (GG), which have 13% and 12% weightings in the fund respectively. GDX is a global fund with a 65% allocation to Canada, 12% to the U.S. and 8% to South Africa.

The companies in GDX are relatively mature, and the fund has a trailing dividend yield that was just under 1% when it paid last December.

GDXJ owns small-cap and mid-cap stocks. According to the fund's fact sheet, these companies "hold real property that has the potential to produce at least 50% of the company's revenue from gold or silver mining." That, of course, means mines that have yet to produce gold.

Canadian stocks dominate GDXJ, with a 65% weighting, followed by 19% to Australian companies. Interestingly, Australian stocks only have a 4% weighting in GDX. GDXJ pays no dividend.

GDX started trading in early 2006, a little over a year after the SPDR Gold Trust (GLD) became the first ETF to offer investors access to gold bullion in a brokerage account. Before GLD, investors wanting some sort of gold exposure in a brokerage account would look toward a mining company. When GLD started trading, it offered a choice that previously did not exist.

GLD attracted assets perhaps at the expense of the gold miners. GLD and GDX tracked closely without much price appreciation for a short while, but then diverged. In 2008, GLD began to dramatically outperform. While demand for GLD may have contributed to the lag in mining stocks, rising energy costs also contributed to the decoupling.

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