Major Market Disturbance Brings A Golden Opportunity

Written by Jason Simpkins
Posted May 16, 2017 at 7:40PM

If you own the VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ), we’ve got some very important news for you. 

In fact, even if you don’t own shares of GDXJ, your holdings could still be affected by a major market disturbance that’s coming down the road. 

What we’re about to see is a knock-on effect that could drag down a huge number of junior miners, and then, just as quickly, deliver unto them massive gains

Again, this event could rock the whole sector, but it’s all centered around GDXJ. 

Here’s the deal… 

VanEck established GDXJ to invest in junior gold miners. We’re talking about small-cap exploration and development companies. But over time, more and more money flowed into the fund. It’s grown from roughly $1 billion in assets in 2010 to about $5 billion today. 

Well, as it turns out, you can’t pour that much money into teeny-tiny junior miners without fundamentally altering the market. Remember, these are stocks that, in many cases, have a market cap of less than $100 million. So it’s not hard to move the needle with a big investment. This is why juniors are so notoriously volatile to begin with. 

Furthermore, regulations both here and abroad prohibit the fund from taking an outsized role, say 20%, in many of these small companies. This caps the amount GDXJ can invest in certain stocks. 

In any case, GDXJ solved this problem by simply investing in bigger, mid-tier mining companies. For instance, Harmony Gold Mining (NYSE: HMY), a company with a $1 billion market cap, now carries as much portfolio weight as Fortuna Silver Mines (NYSE: FSM) — a $650 million company. 

Hochschild Mining PLC (LON: HOC), valued at $1.35 billion, makes up 2.64% of the portfolio. 

These purchases of mid-tier miners have now pulled the ETF away from its underlying index — the MVIS Global Junior Minors Index. That’s the index the fund was intended to mirror. 

At this point, something has to be done. 

It’s just not yet clear what that something will be. 

It may simply be expanding the fund’s focus beyond junior miners to include mid-cap miners as well. In that case, I’d imagine some investors could bolt. After all, this was supposed to be a junior mining ETF. Changing the rules to include mid-cap companies betrays that base-level mandate. 

Similarly, many investment funds have strict rules about what they can invest in. If GDXJ, abandons its small-cap focus, it may no longer qualify for those funds. In that case, funds that specialize in juniors could be forced to unload their holdings. 

If that’s the case, if GDXJ sees significant outflows, or if it’s forced to restructure its holdings to align with a new mandate, there’s going to be something of a bloodbath. 

As I said, these are small companies. Any large-volume buying and selling — the restructuring of a multibillion-dollar fund — will send shockwaves through the entire sector. 

That’s especially true of GDXJ holdings. A complete list of all 57 companies can be found here, but these are the top 15.

GDXJ Holdings

Now, having said that, there’s a tremendous upside to all of this. 

In fact, you might even term it a once-in-a-lifetime buying opportunity. 

Indeed, a lot of these companies are really good stocks. They’re stocks we’ve talked about and even recommended in the past. Alamos Gold and B2gold Corp, for example, are two junior miners that have made it into recent Outsider Club articles. Great Panther Silver (NYSE: GPL) is another, though it fails to crack GDXJ’s top 15 holdings. 

Here’s how our own Nick Hodge framed it in an interview with Marin Katusa on Friday: 

“There's going to be some stocks that end up getting sold for below their intrinsic value and not only that, there's going to be a new junior ETF from what I understand that's going to be created, that's going to, I think, eventually come in and have to buy some of these equities.” 

Did you catch that? 

GDJX has essentially abdicated its position as the premier junior mining ETF. And once it officially moves on with a restructuring or rebranding, a new junior mining ETF is all but certain to take its place. 

That means huge purchases of these beaten down small caps will ignite a huge new rally that delivers massive gains to investors who bought at the bottom. 

Consider, for instance, the ProShares Ultra Junior Miners ETF (NYSE: GDJJ) — a rival junior fund that is leveraged to double the performance of the MVIS Junior Gold Miners Index. It could suffer dramatic losses in the wake of a restructuring, but its rebound would be doubly dynamic. 

These are the kinds of opportunities we’ll be looking out for in the months ahead. Especially since the gold market recently hit a major milestone

Indeed, the industry as a whole is sound. It’s just a matter of picking the right stocks.

Get paid,

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Jason Simpkins

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Jason Simpkins is a seven-year veteran of the financial publishing industry, where he's served as a reporter, analyst, investment strategist and prognosticator. He's written more than 1,000 articles pertaining to personal finance and macroeconomics. Simpkins also served as the chief investment analyst for a trading service that focused exclusively on high-flying energy stocks. For more on Jason, check out his editor's page. 

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