You should all keep in mind what a "junior gold stock" is. Its an exploration company, *not* a mining company. A typical junior exploration company has a couple of geologists, a guy with a drill, and the mineral rights to some plot of land that may or may not have a viable deposit. They have no income, they only way they can raise money is by issuing more shares, diluting the ones already outstanding. So basically junior gold stocks are gambles -- if they find an economic deposit they can double, triple, quadruple, or more in value. But they very commonly go to zero. The usual positive outcome for a junior gold explorer is to have their property bought out by a gold major after it has been proved to be an economic deposit. In most cases the juniors have neither the skills nor the capital to do the mining themselves. Don't bet the farm on this ETF.
Of course, you are correct. The exposure is not to gold but to exploration plays. Now that the JR.'s are off the table what are the pros and cons of using an ETF that holds the bullion vs real mining companies? Does it largely depend on where in the cycle we are?
You want to be in the small/junior miners with the highest leverage when gold shoots up +100$ in one day. Many of them will be up 50% in one day at which point you should take some money of the table and let the rest run in case we see gold move higher than 3K an ounce. GDXJ offers the upward potential with the hedging factor of diversication. It is my second biggest holding in the mining sector next to Novagold.
The downward potential for gold obviously is not any different than for every other financial asset out there. People like to attribute gold with a higher degree of risk which is either by false intent or plain ignorance. As far as the ramifications go for a collapsing price of gold market logic would suggest it to be accompanied with a strengthening USD offsetting the loss at least partially for non USD residents as myself included. On the other hand common logic dictated an inverse relationship between the price of gold and the USD which has clearly decoupled in 2010 so the assumption of the USD strengthening with a crashing goldprice might be proven to be false as well. So anyway, a play on the miners is a bet on liquidity remaining abundantly available in the system which could be hedged by a shortposition on the miners or the main markets themselves or simply by staying in cash. I am not a believer in the mining sector being able to decouple itself from market sentiment should we revisit the 2008 lows again regardless of gold's performance itself during such a period.
I bought some HL and AUY today. Both some of the weakest performers in the sector these last months. Fingers crossed.
Junior miners are best in the late stages of a speculative blowoff. If that happens in gold, they will perform similarly to the shitty dot.com junk that went up 10-100 fold from 1998 to early 2000. The trouble is, they can go to zero, so you can't really invest more than about 5-10% of capital into them unless you are a nutter. Arguably the best way to use them is with Darvas/Zanger trading tactics i.e. wait for breakouts from extended bases, and then pyramid in as they move higher, using a wide trailing stop. That's how Zanger turned 18k to 20+ million in 2 years during the dot.com bubble blowoff.