Tuesday, May 23, 2006

Van Eck GDX releases Briefing Book on Gold Miners index ETF.

Van Eck Global, sponsor of the new GDX AMEX Gold Miners ETF, has rung the AMEX opening bell, as shares of GDX started trading yesterday.

Van Eck now has a homepage for GDX, which includes a briefing book on the ETF. Page ten of the document begins describing the investment case for GDX.

  1. The GDM index has 44 components, which makes it more complete and diverse than other Gold focused indexes (^HUI and ^XAU).

  2. Gold Miners are uncorrelated to S&P 500. Van Eck reports a three year beta to S&P500 of 0.17, with a correlation of 0.07 (meaning that only 7% of GDX's movements are explained by movements in the S&P 500).

  3. Gold Miners are leveraged to the spot price of gold, Van Eck reports a three year beta to gold of 1.82, with a correlation of 0.77

  4. Gold Miners tend to have some exposure to silver; GDX has beta and correlation of 0.66 and 0.50 to silver

  5. Gold companies have a chance to benefit from development and exploration successes, and company-specific increases earnings. With good management a gold mining company will have asymmetric beta towards to gold prices.

  6. Income from dividends, Van Eck says the index should yield about 0.6%.

  7. Tax advantaged compared to direct investment in gold. 28% vs 15% capital gains tax rates.

Of course in sections on benefits of ETFs as class Van Eck fails to mention cost, probably because Van Eck's own mutual funds have extravagant management fee's of more than 2% compared to GDX's 0.55%. Bill Cara thinks that Van Eck launched GDX to provoke a rally in gold mining stocks, similar to how precious metals ETF's helped start the current metals boom.

I think that GDX is better than the precious metals ETFs. It has real potential for growth above that from movements in gold. It pays dividends. It offers more exposure to gold for the same dollar investment. It is not guaranteed to lose value. And most importantly, GDX still provides the diversification benefits of investing in precious metals.


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