Skip to main content

How to Play the Gold ETFs

These ETFs may respond more to the price of the metal than to strong earnings.
  • Author:
  • Publish date:

NEW YORK (TheStreet) -- Gold mining shares and ETFs such as Market Vectors Gold Miners (GDX) - Get VanEck Gold Miners ETF Report remain a good choice for investors, even as gold prices have trouble rallying.

Driven by widespread financial panic and a desire for stable investment opportunity, gold prices steeply ascended in May and June thanks to demand from American and East European markets.

Yet very recently, gold futures dipped in response to stronger U.S housing reports, as well as a recent set of European bank stress tests that took place last week, showing signs that, as fears of economic meltdown gradually subside, the yellow metal's price acceleration may cool down.

In another example, the most actively traded gold contract, specifically for December delivery, dropped by $4.60, or roughly .4%, settling at $1,187 an ounce on the Comex division of the NYSE. Furthermore, U.S Treasury prices dropped in response to government data that showed a rebound in homes sales last month.

Overall, both trends suggest a recent increase in market confidence, which may, in fact, erode the high gold prices we have observed over the past few months. In short, as less concerned investors detach themselves from the refuge and financial comfort of gold holdings, the steep price spiking may simmer down relative to the past few frenetic weeks. This has also caused the miners to underperform in July, but that doesn't make them a bad investment.

As I have mentioned in

past articles

, this fund and its junior miners sibling,

Market Vectors Junior Miners ETF

(GDXJ) - Get VanEck Junior Gold Miners ETF Report

, give investors the opportunity of ETF coverage on either established operations or more volatile explorers and small producers.

Video: Gold is Good, Gold Stocks Even Better >>

In terms of national diversification, Canadian companies lead the fund's holding percentages, representing a substantial 60.2% of the fund's total securities.

Meanwhile the U.S., South Africa and Peru follow in terms of country-weighting, each accounting for 13.9%, 13.2% and 4.3% of the fund's total holdings, respectively.

In terms of top holdings, GDX's largest players include

Barrick Gold

TheStreet Recommends


with 16.3%,



with 11. 9%,

Newmont Mining

(NEM) - Get Newmont Corporation Report

with 10.8%,

Anglogold Ashanti

(AU) - Get AngloGold Ashanti Ltd. Report

with 5.9% and

Kinross Gold

(KGC) - Get Kinross Gold Corporation Report

with 4.8%.

Over the past year, GDX gained 23.5% and it is up 6.5% thus far in 2010. That compares to a 14.7% gain and a 0.5% loss over the same period for SPY.

Fidelity Select Gold

(FSAGX) - Get Fidelity Select Gold Portfolio Report

offers similar exposure. In terms of country diversification, FSAGX is largely rooted in Canadian gold corporations, with 50.6% of the fund's assets designated to Canadian companies and 17.2% to American holdings. Other noteworthy nations include South Africa (11.2%), Australia (7.0%), and the United Kingdom (6.3%).

Almost mirroring GDX's allocation, FSAGX's top five holdings include Barrick , Gold Corp, Newmont, Anglogold Ashanti, and

Randgold Resources

(GOLD) - Get Barrick Gold Corporation Report


In its entirety, FSAGX contains 107 individual holdings, and is relatively top heavy, with the top 10 holdings within the fund comprise 62.3% of its total assets.

In terms of performance, FSAGX has very similar returns as GDX too, up 23% in the past year and 6.6% in 2010.

Either fund is a good choice this week ahead of several earnings announcements. The three largest holdings in both funds, ABX, NEM and GG, all report earnings this week, as do

Agnico-Eagle Mines

(AEM) - Get Agnico Eagle Mines Limited Report


Eldorado Gold

(EGO) - Get Eldorado Gold Corporation Report


Even though gold prices have been flat over the past month, stalling the rally in gold miners, the price of gold remains elevated. That should translate into stronger earnings for the gold mining companies, which could lead to higher stock prices.

However, thus far investors haven't rewarded the companies for higher earnings. Instead the stock prices have tended to follow the metal. Therefore, unless we see an earnings rally this week, investors may be stuck following the price of gold. For long-term investors, that provides the opportunity to pick up shares at less than their full value.

-- Written by Don Dion in Williamstown, Mass.

Readers Also Like:

>>Stocks Under $5 With Biggest 'Disconnects'

At the time of publication, Dion Money Management was long Market Vectors Gold Miners.

Don Dion is president and founder of

Dion Money Management

, 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.