“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffett
The legendary investor is known for his antagonistic take on gold as an investment option. Recently, gold has fallen from grace as an investment option due to the slump in prices which has somewhat tarnished its image as a gold haven. The words of Buffet never rang so true. However, it remains to be seen whether gold can be written off as having “no utility” as yet.
2013: A Nightmare Year for Gold
Overall, gold suffered a 28% drop during the year, exiting at around $1,200 per ounce – the worst slump in more than three decades. A multitude of factors – the Federal Reserve’s taper or no taper confusion, conflict in Syria and the U.S. government‘s partial shutdown, and finally the taper call at year end – pushed gold prices downhill through the year.
Things Look Better in 2014
So far in 2014, gold prices have ranged from $1,221 per ounce to $1,372 per ounce, averaging $1,264 per ounce to date. The Fed’s announcement on Jan 29 to reduce asset purchases by another $10 billion a month to $65 billion kept the prices in check.
Dull economic numbers from the U.S. including lower manufacturing PMI and the economy adding only 113K jobs in January, well below expectations and home sales falling more than expected to an 18-month low in January led to the firming in prices.
Contrary to the 2013 lows, Gold mining ETFs have bounced back and are trending higher. Extreme low valuation has opened up buying opportunities for these ETFs. (Read: The best gold mining ETF for 2014)
ETFs to Tap the Sector
Below, we highlight the ETFs in this sector in greater detail for those seeking to make a gold-mining ETF play at this time. (See all Materials ETFs here)
Market Vectors Gold Miners ETF (NYSEARCA:GDX)
GDX is one of the popular gold ETFs on the market today with asset under management of $7.2 billion and a trading volume of roughly 38,773,090 shares a day. The fund charges an expense ratio of 52 basis points a year.
The ETF was formed on May 15, 2006, to track the NYSE Arca Gold Miners Index. The Index provides exposure to publicly traded companies worldwide that are involved primarily in gold mining, representing a diversified blend of small, mid and large-capitalization stocks. The fund holds 35 stocks in its basket, with a concentrated approach in the top ten holdings with 66.36% of the asset base invested in them.
Among individual holdings, top stocks in the ETF include Barrick Gold Corporation (ABX), Goldcorp and Newmont Mining Corporation (NEM) with asset allocation of 13.51%, 12.71% and 6.96%, respectively. (Read: Gold ETFs in focus on recent surge)
Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ)
Another popular choice in the gold miners ETF market is GDXJ, a fund tracking the Market Vectors Junior Gold Miners Index, which provides exposure to small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining. The product has $1.45 billion in assets with a daily volume of 2,820,597 shares. It charges 55 basis points in annual fees. (See: Gold ETFs in focus on recent surge)
The fund has a total holding of 67 stocks with approximately 96% weightage toward small cap companies and the rest in middle cap companies. It is widely spread with none of the companies holding more than 4.07% of assets. SEMAFO Inc. (SMF.TO), McEwen Mining Inc. (MUX) and China Gold International Resources Corp Ltd (CGG.TO) occupy the top three positions in the fund with asset allocation of 4.07%, 3.92% and 3.87%, respectively.