Friday, May 19, 2006

Bill Cara on GDM Van Eck Gold Miners ETF

Bill Cara is not amused by the new Gold Mining ETF (GDM) sponsored by Van Eck Associates.

Bill Cara points out an a very important issue with the recent development of Metal/asset backed ETFs. The question is if the ETF is creates demand for itself. For several months before the
iShares Silver Trust (SLV) came online, silver prices rallied on the expectation that the creation of the silver ETF would raise prices. The same thing has happened with Gold ETF (GLD). A vicious circle was established in which rising gold prices lead to increased demand for GLD shares which caused higher prices for gold. Excellent fuel for a bubble.

Bill Cara wonders if a similar situation will happen after the Gold Mining ETF has been launched. If the GDM index continues to have a beta of 2.0 relative to gold, then it will attract heat chasing gold investors. More demand will raise prices for the ETF shares and for the underlying gold stocks. Van Eck isn't a disinterested sponsor. Van Eck runs several gold and hard asset mutual funds, that would greatly benefit from a rise in gold stocks caused an ETF launch.

I'm not as jaundiced as Bill Cara. I think that Van Eck is thinking like First Trust; they realize that it is better to collect smaller fees on a really big ETF than it is to collect high fees on small mutual funds.

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