NEW YORK (TheStreet) -- For investors expecting the gold miners to report strong first quarter earnings this week, now is the appropriate time to gain exposure to gold through the miners.
will report earnings Tuesday, while
report on Wednesday. Combined, these companies account for 38% of the net assets of
Market Vectors Gold Miners ETF
Last earnings season, the reports from these top components of GDX were spread out over the course of almost a month, with a week or more separating each company's announcement. All three companies beat estimates, but the impact on GDX was minimized due to the timing of the reports. This time around, the effect of the reports on GDX will be more direct.
ETFs are an optimal tool for investors to catch a trend that will affect an entire sector. In earnings season, investors can try and maneuver around those occasions where a report from a single company or, more often, a group of companies, can identify a developing or emerging sector trend. In the case of gold, investors want to see the high demand for gold translate into profits.
During the financial crisis, it seemed as though almost every country was at risk of having problems, and gold was sought as a hedge against potential market disaster. The picture has brightened globally, but a shadow of financial doubt is still cast over Europe courtesy of Greece's budget problems and the rest of the continent's linkage to their mess via the euro. Gold has hit new all-time highs in euros in 2010, even though it is below 2009 highs in U.S. dollars.
In the background are inflation fears. Although they've yet to manifest, many investors are convinced that inflation will return in force and that gold will be a good way to hedge their risk. Also working in gold's favor are emerging markets such as India and China, where economic strength means consumers have rising incomes to support their gold demand.
Analysts expect that gold will increase in value in 2010, but the real gains in terms of an investment will be in shares of gold mining companies. In addition to seeing their earnings rise, these firms may see multiple expansion as the sector becomes more attractive. GDX is still below its 2008 peak as well, even though earnings and revenues have been moving higher in the industry.
Investors can try and choose which gold mining company will be able to capitalize on the demand for the commodity best, or they can hedge company-specific risk by choosing an ETF such as GDX.
If investors have a bit more risk appetite and want to take a small-cap approach to gold miners, there is the option of going with
Market Vectors Junior Gold Miners ETF
. Both very popular funds have high daily trading volumes, so investors will not have any liquidity concerns with either investment.
GDXJ is generally more volatile though. At the start of 2010, it outperformed during the rally, and then underperformed during the sell-off. Since early March, shares have been outperforming GDX. Year to date, GDX is up 4.3% and GDXJ is up 10.9%.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion was not long any equities mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.